August, 2014 PCM Quant Coalescence
What a difference 2 weeks makes. After "Risk On" dominated in our indexes at the time of the rebalance in mid-July, ourindexes rotated to a very conservative stance for the August 1st reallocation. It appears the culmination of unrest in Israel, Iraq and Ukraine, the downing of a commercial airline by rebels, ebola, a sovereign bond default in Argentina, the Fed continuing it's taper now down to $25 billion per month and talk of raising rates sooner rather than later.....might have finally been enough to put some fear in the markets. Who would have thought? PCM Absolute U.S. Sectors and PCM U.S. Industries both picked up inverse exposure to the Dow Jones Industrial Average as a part of their overall reallocation, while technology, cash equivalents and REIT's are also a theme. Emerging Market Equity hit another all time high at the end of July and is one of our only indexes that remained fully committed to long equities. PCM Total Return andStable Growth Plus both picked up heavy exposure to cash equivalents, U.S. Treasuries and some exposure to inverse Dow Jones. The only U.S. equity exposure is a small allocation to materials and technology. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Index also rotated more conservative into inflation protected U.S. Treasuries, emerging market bonds and on the equity side China, Singapore and Hong Kong. TheAlpha One Index rotated to 100% cash. Although the reallocation was on Friday, August 1st, the Alpha One Index analysis pegged the move to cash on Wednesday evening before the market even began it's sell-off.PCM Absolute Metals Index now has a heavy exposure to cash equivalent and also to aluminum. PCM Commodities Index remained in copper and added cocoa..
On the bond side, credit spreads between junk bonds and U.S. Treasuries just spiked higher after reaching lows that haven't been seen since the summer of 2007. A credit spread is the difference in yields between two bonds of similar maturity, but different credit quality. It widened as "risk off" took hold in the credit markets, as investors sold lower quality bonds and demanded a higher yield. This same scenario was one of the first signs of trouble for all asset classes in 2007 and into 2008. Interestingly, the PCM US Bond Index partially allocated to an inverse position in high yield debt on Friday, as we continue to see our models with a strong "risk off" bias across all asset classes. The PCM Absolute Bond Indexis in U.S. treasury inflation protected government bonds, as well as 20 plus year U.S. Treasuries.
PCM Index Strategy composites have again been recognized for performance by Informa Investment Solutions; this time for the 1st quarter of 2014, as well as 1-year trailing performance and 3-year trailing performance. ThePCM Absolute Bond strategy and thePCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with thePCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. ThePCM Alpha 1 strategy was awarded the "Top Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as thePCM Absolute BondandPCM Alpha 1 are particularly timely for where we are in the current market cycle.
To view Morningstar Fact sheets of all of our index models, please visit our website atwww.pcminvestment.com under the "indexes" tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by Co-CIO's Michael Chapman.
The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.
About "PCMQuant Coalescence"
Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.