Readings, Month-End Preview

I will be traveling the next few days and may be unable to post month-end reviews this weekend. However, they will be posted next Monday at the latest.  As a reminder the Ivy Portfolio spreadsheet signals updates daily.

Below are a few quick notes/articles

Andrew Horowitz updates us on the Spearman Indicator

ETF Trends on TVIX fallout, natural gas ETNs plummeting, and ETFs currently trading at wide premiums/discounts to NAV.

Hmmm…Holland (pdf) – John Mauldin

Peter L Brandt asks Would Jesse Livermore be looking to go short Apple? and Gold Ready to Attack New Highs

Trading Video and Gold Update

Chris Vermeulen just posted a trading video detailing what to look for this week in gold, silver, gold stocks, oil and the major indexes.

Below is chart for GLD that I have frequently updated.  The weekly chart shows a long-term price channel which began in 2008. Key fibonacci price levels are also shown in blue.

You will see below that we touched the bottom of the price channel last week and also came within $.56 of the 23.6% retracement level. This price channel has been a decent indicator the past three years as to when GLD has become over or under extended.  When it has broken the top of the channel, sharp pullbacks followed.  Approaches at the bottom of the channel have been followed by price rebounds.

There is no way to know how long this price channel pattern will continue (nothing lasts forever), so proper risk management is always the first priority:

No position in GLD

More on this topic (What's this?)
Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
Read more on Gold, SPDR Gold Trust at Wikinvest

Following the Smart Money Update

I first wrote about mimicking “smart money” in 2010 when I back-tested portfolios which held top holdings from select hedge funds.  The tool used to consolidate and back-test the strategy was AlphaClone, which seeks to “clone” or simulate investing in the ideas of the world’s best investors when they are made public.  They do so by tracking public filings of hedge funds and institutional investors. While there are limitations to this system – a hedge funds quarterly filing may contain purchases that are weeks or months old – the historical performance of following institutional money is worth further investigation.

Most opposition to using public filings to mimic institutions comes from those who recognize the time lag between when an institution may actually hold shares and when they have to disclose positions. The perception is that this time lag makes it impossible to ride the coat tails of “smart” money; however,  research suggests cloning has worked even with this time lag (it goes without saying that there is no guarantee this out-peformance will continue into the future). The tests below are also intriguing in that they show consistent out-performance versus the S&P 500.

The portfolio in my 2010 article used a clone of 10 top institutional managers selected by Mebane Faber. The particular clone purchases the top 5 most popular stocks among these 10 managers as determined by how many managers hold a stock in their top 20 holdings; the clone’s holdings are then re-balanced quarterly.

A long only portfolio of 5 stocks invested in this clone had the following returns since 2000,  beating the S&P 500 every year except 2003:


Yearly Returns

Year Clone SP500 +/-
2000 43.4% -8.2% 51.6%
2001 8.6% -11.9% 20.5%
2002 -11.0% -22.1% 11.1%
2003 27.2% 28.7% -1.5%
2004 42.0% 10.9% 31.1%
2005 13.0% 4.9% 8.1%
2006 27.1% 15.8% 11.3%
2007 8.4% 5.5% 2.9%
2008 -32.0% -37.0% 5.0%
2009 54.1% 26.5% 27.6%
2010 18.7% 15.1% 3.6%
2011 5.6% 2.1% 3.5%
2012 23.5% 11.6% 11.9%

For those of you with a sharp eye, you will notice the clone’s back-tested performance may differ in certain years versus the tests posted in 2010. This difference in performance is due to AlphaClone updating their tiebreak rules for popularity based clones, affecting historical test results.

The clone’s performance statistics:

Performance Statistics as of 2012-03-25

Total Return 132.2% 77.7% 531.8%
Annualized Return 32.4% 12.2% 16.4%
Annualized Volatility 18.5% 21.7% 18.8%
Sharpe Ratio 1.5 0.4 0.7
Max Drawdown -12.8% -44.4% -44.4%
Average Turnover 50.0% 50.0% 50.0%
Alpha 9.5 10.6 14.2
Correlation S&P 0.9 0.9 0.7

Below is an image of the clone’s equity curve:

This clone still suffered a significant draw-down of -44.4% in 2008, but it was slightly less than the S&P 500’s -50%+ draw-down.  It has also been highly correlated to the S&P 500 despite out-performing it.

A portfolio of 5 stocks is too concentrated and potentially volatile for my tastes, but the clone could be expanded to 10 or 20 stocks and could also be combined with other strategies and investments as part of an overall portfolio. This clone was also just one clone of potentially hundreds you can run using AlphaClone and used one strategy (top 5 popularity) among man different strategies.  For the risk-adverse, you can also test hedged versions of each clone (see my original article for two examples).

Apple (AAPL) is the current top holding in this clone with a 35% weighting with Google (GOOG) as the second highest weighted stock.

All return figures calculated and courtesy of AlphaClone. Returns exclude commissions and taxes.

No positions in stocks mentioned


More on this topic (What's this?)
Some light reading:
Hedge Funds Are Doing Terribly This Year
Twitter Digest: 2012-09-30
Read more on Hedge Funds at Wikinvest

Weekend Linkfest

Below are some investment and economic related readings/links for this weekend:

In Praise of Concentration and Why Systematic Models are Great – Systematic Relative Strength

SP500 Undervalued Versus M2 – Tom McClellan

Montier on Peak Earnings and Why Using P/E Ratios Can Be Misleading – Barry Ritholtz, The Big Picture

You are not all that unique an investor – Abnormal Returns

What the *!@#$% Happened to the VIX ETFs? (TVIX) – The Disciplined Investor

A Random Walk Through the Data Minefields (pdf) – John Mauldin



TVIX Goes Haywire

The VelocityShares Daily 2X VIX Short-term Exchange Traded Note (ETN), symbol TVIX, from Credit Suisse has been in the news this week due to its price collapse. The company halted share creations on February 21st apparently due to excessive asset growth in the ETN which triggered internal risk controls.  The ETN tanked this week, down over 50% for the week.

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It is first important to understand that TVIX is an ETN, which differ from ETFs in that ETNs are debt obligations of the issuer.  There is no underlying stock or commodity backing an ETN while an ETF such SPY is obligated to hold a basket of stocks using the methodology detailed in the prospectus.   ETNs are essentially a promise-to-pay or IOU of the issuer.  However, the recent and sudden price decline in TVIX appears to have less to do with the credit risk inherent in an ETN and more to do with the fact that even after Credit Suisse halted share creations in February the market continued to bid up TVIX to an incredibly high premium to net asset value.  TVIX was essentially trading at a huge premium to NAV yet investors continued to demand (buy) the product.

The recent price action in TVIX is a learning experience, especially for investors in the VIX and leveraged ETF/ETN world.  It is also an important reminder of the difference between ETFs and ETNs and a reminder for all investors to understand the products in which you invest and trade.

For those who have not been following the story, below are a few articles exploring this week’s collapse in further detail.  I am not an expert on the share creation process for ETNs and frankly was not even aware of the existence of TVIX until this week, so this was a learning experience for myself as well.  The articles below all cover the TVIX story in much further detail:

TVIX Creation Units Return; What It Means for Investors – VIX and More (he has several more articles specifically on TVIX worth the read)

TVIX – Not Your Daddy’s Blue Chip – Kid Dynamite (see also his post here)

TVIX Resumes Creations On Limited Basis – IndexUniverse

A Warning to Investors: Don’t Get TVIX’ed! – Jeff Macke

No current position in TVIX

Permanent Portfolio Smack-Down

In February Global X launched a Permanent Portfolio ETF, symbol PERM.  The fund’s fact sheet states it “seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Permanent Index.”

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The Solactive Permanent Index “tracks the performance of four asset class categories that are designed to perform differently across different economic environments, as defined by the index provider. On each rebalance, the Underlying Index allocates 25% each to four asset class categories: Stocks, U.S. Treasury Bonds (Long-Term), U.S. Treasury Bonds (Short-Term), and Gold and Silver.”

This allocation closely correlates to Harry Browne’s proposed allocation in his 1998 Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.  Browne proposed an equal-weight portfolio of stocks, long-term bonds, cash, and gold. Today an investor could create this portfolio using as little as four ETFs: SPY (SPDR S&P 500 ETF), TLT (iShares Barclays 20+ Year Treasury), SHY (iShares Barclays 1-3 Year Treasury Bond Fund), and GLD (SPDR Gold Trust).  I recently posted some historical results on this allocation here.

How closely has PERM correlated to the 4-ETF Browne Permanent Portfolio referenced above?  PERM has a very short trading history, so these results are very preliminary.  However, this type of comparison could be useful to periodically monitor for investors weighing an all-in-one Permanent Portolio solution (PERM) versus a self-managed, multi-ETF Permanent Portfolio.

Click here for MarketClub’s Top 50 Trending Stocks

As expected, an equal weight portfolio of SPY/TLT/SHY/GLD (Portfolio A) has been highly correlated with PERM (Portfolio B) since February 8th, 2012. The results using ETF Replay are below.  It is important to note that PERM has not yet paid a dividend, while SPY, SHY, and TLT have all paid dividends since February 8th. These dividends are reflected in the returns for Portfolio A, which helps explain the small out-performance to date.  I will revisit the comparative results once PERM has paid a dividend, which will give us a more accurate total return comparison for both portfolios:

No positions in stocks mentioned

More on this topic (What's this?)
Quick Tidbit
Read more on Permsin Steel at Wikinvest

Tuesday Readings

Below are some articles I am reading this week:

Demographic Changes, Financial Markets, and the Economy (pdf) – Rob Arnott & Denis Chaves

The Villain – The Atlantic

An Angry Army of Aunt Minnies – John Hussman

Weeks When Decades Happen (pdf) – John Mauldin

China’s Economic Miracle of Mirage – Satyajit Das

Systematic Risk, Multiple Equilibria and Market Dynamics – Mohamed El-Erian

World’s Cheapest ETF Portfolio – Matt Hougan

Corn – $2.75 per bushel move is pending (very soon) – Peter Brandt

Follow Up to Managed Futures Article

Yesterday’s article on Managed Futures needs additional clarification. Eric from Brandywine Asset Management —  founded by Mike Dever, author of Jackass Investing: Don’t do it. Profit from it — emailed two points in relation to the article.

First, the action section of the Jackass Investing website no longer recommends RYMFX (it was originally recommended in the book). The Rydex product (RYMFX) was replaced with GPFCX, a Grant Park fund. Second, AMFAX has a version of the A shares available on the Morningstar site (symbol AMFAX.lw) with the load waived; also, there are C and Y shares available according to the fund’s fact sheet (pdf).

As always, please make sure to do your own due diligence and consult your own investment adviser before making any investment decision. Happy investing!

Investing in Managed Futures

I recently wrote a review of Mike Dever’s Jackass Investing: Don’t do it. Profit from it.  Dever is a proponent of adding managed futures (among other assets/strategies) to portfolios in order to increase diversification. He provides four managed futures mutual funds in his book and action section of the book’s website – Altegris Managed Futures Strategy C (MFTCX), Rydex|SGI Managed Futures Strategy H (RYMFX), MutualHedge Frontier Legends C (MHFCX) and Natixis ASG Managed Futures Strategy A (AMFAX).

Managed futures can be defined as alternative investments which take long and short investments in futures contracts and options on futures contracts. Managed futures can be accessed either directly with  licensed CTAs (Commodity Trading Advisor) who are regulated by the CFTC (Commodity Futures Trading Commission) or via mutual funds and ETFs/ETNs that mimic managed futures strategies.  When investing with a CTA a large minimum investment is typically required, making mutual funds and ETFs a more viable option for many investors.

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Managed futures mutual funds tend to have relatively high fees and there are limited ETFs/ETNs in the managed future asset class – WisdomTree Managed Futures Strategy ETF (WDTI) and ELEMENTS S&P CTI ETN (LSC) are currently two of the only ETF/ETNs in the managed future world.

The fees on the four mutual funds recommended in Dever’s book are below along with the fees for WDTI and LSC (data courtesy of Morningstar):


Fund Load? Expense Ratio
MFTCX no 4.62%
RYMFX no 1.97%
MHFCX no 6.67%
AMFAX 5.75% 1.70%
LSC N/A 0.75%
WDTI N/A 0.95%

The expenses for managed futures mutual funds are significantly higher than a typical index equity or bond mutual fund and WDTI and LSC have higher expenses than many index based ETFs.

Managed futures typically have low correlations to other asset classes such as stocks, bonds, and real estate making them a potentially appealing asset class for investors seeking to improve diversification.  An asset correlation matrix for the four funds listed in Jackass Investing along with LSC and WDTI is below.  The funds are listed alongside ETFs representing some traditional asset classes – US Equities (SPY), bonds, (AGG), emerging markets (EEM), Treasury-inflation protected securities (TIP), Gold (GLD) and real estate (VNQ):

The managed futures funds have shown higher correlation among themselves and lower correlation to equities and REITs over the past 6 months.

Below is the performance of the four mutual funds and WDTI/LSC compared to SPY over the past year:

The performance over the past 5 years is below:

The managed futures funds have undererformed SPY in recent months, but if one is seeking low correlation to SPY then this is not surprising considering the recent bullish trends in equities.

If and when more ETF providers start offering exchanged based managed futures products, then fees should theoretically decrease. It is worth noting that in December ProShares filed for three managed futures ETFs. The hope is that with increased competition investors will have a wider range of strategies to select from in the managed futures class and less performance will be paid back to the fund sponsor in the form of fees with more performance returned to investors. Until then, investors who do not qualify for the minimums in CTA accounts are left with limited options in the ETF and mutual fund space.

No positions in funds listed

MarketClub Trade Update

MarketClub gave a “cash” signal today on USO (United States Oil Fund) at $39.91. For background on the portfolio please see my initial article on the portfolio here.  The initial long position was triggered at $38.96, resulting in a hypothetical gain of 2.44%.

According to MarketClub’s trade triangle system FXE (CurrencyShares Euro Trust) and GLD (SPDR Gold) remain in a strong downtrend/sell signal but this portfolio is not shorting stocks so it remains in cash on these positions.

SPY (SPDR S&P 500) remains a “buy” according to MarketClub’s trade triangle system.

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