June, 2015: Bond Yields Continue to Rise
Happy Friday and before we begin, I want to provide a quick reminder that we have enhanced our website at https://www.pcminvestment.com. One of the main enhancements is that we now include performance for both our indexes and our composites as applicable. Also new; you will be asked to enter your email address to get into the website. There will be no password required, so you won’t have to worry about forgetting it. This is partly due to helping us stay in compliance with requirements in our industry that we know who has reviewed our website content.
Now let's move on to the June quant analysis!
Greece has been in the spotlight, as today’s June 5th deadline for their payment to the IMF comes and goes. Greece was allowed to again buy some time by bundling the payment due today with the next payment due in a few weeks. Bonds worldwide are reacting to the continued uncertainty in Greece, as bonds sell off and yields go higher despite still being at historically very low levels. Some analysts also believe the spike in yields on longer term bonds is due to the spike in oil, as investors’ fear of inflation kicks in. Lastly, today’s job numbers were seen as strong and supportive of the Fed in raising rates sooner rather than later. This would be in line with the trend of good news being bad news. With respect to equities, the situation in Greece is making U.S. equities much more attractive than in Europe. Our June quant analysis picked up on these themes, as allocations to ETF’s that track the inverse of bond prices and ETF’s that track U. S. equities were both strong themes.
Both PCM US Bond Total Return Indexsm and PCM Absolute Bond Indexsm remain allocated to inverse 20 year U.S. Treasuries and high yield corporates. PCM Absolute U.S. Sector Indexsm stayed long equities with exposure to financials, healthcare and consumer discretionary. PCM U.S. Industries Total Return Indexsm picked up consumer staples and insurance, as well as remaining in media. The PCM Absolute Equity Income Indexsm rotated to a heavy cash equivalent position with the remainder in U.S. preferred stocks.
The June reallocation of the PCM Emerging Market Total Return Equity Indexsm also moved to heavy cash equivalent with a small position in emerging Asia.
Inverse U.S. Treasuries and long U.S. equities in general are all represented heavily in the PCM Total Return Portfolio Indexsm and PCM Stable Growth Plus+ Portfolio Indexsm. Both Indexes also hold the U.S. Dollar. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Indexsm is long equities in Switzerland and the U.S. with the focus on healthcare, financials and consumer discretionary. The Global Macro Indexsm is inverse 20 year U.S. Treasuries, long U.S. equities, long the U.S. dollar, and long emerging market bonds and high yield corporate bonds in the U.S.
The PCM Alpha 1 Indexsm continues the U. S. equity theme, allocating to an ETF that tracks the Russell 2000. The PCM Absolute Metals Indexsm has exposure to silver and to cash equivalent, while the PCM Absolute Commodities Indexsm moved into livestock and cocoa, as this index is seeing very substantial outperformance both last year and year to date vs its appropriate commodity index.
PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently for the PCM Absolute Bond Compositesm for the three year performance ending the 4th quarter of 2014, as well as previous awards for 1-year trailing performance and 3-year trailing performance. As of 2nd quarter 2014, the PCM Absolute Bond Compositesm and the PCM Absolute Commodities Compositesm both won a “Top Gun” award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond Compositesm also winning the “Top Gun” award for 3-year trailing performance. The PCM Alpha 1 Compositesm 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 the PCM Absolute Bond Strategysm and PCM Alpha 1 Strategysm 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 at www.pcminvestment.com under the “PCM Strategies” tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided CIO 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 "PCM Quant 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.