February, 2014 PCM Quant Coalescence
The February reallocation completed Monday resulted in a continued migration to a more conservative and neutral stance across the majority of PCM indexes. This was an extension of the more conservative positioning that resulted from the mid-month January trading. The PCM Global Tactical Index moved very defensive; allocating 20% each to short term U.S. Treasuries, 20 year U.S. Treasuries, utilities, high yield corporates, with the only exposure to equities being the final 20% in U.S. preferreds. The Alpha One Index remained committed to PFF, a more conservative option of preferred shares in the US equity market. The Emerging Market Equity Total Return Index had an interesting January, as it held up very well; experiencing a fraction of the downside seen in the overall emerging markets. The new allocation in this index went 33% into inverse emerging markets. The U.S. Sectors Index also allocated 33% inverse the Dow Jones. As the Fed begins the taper, while macro-economic numbers are beginning to disappoint, the Fed members speaking in the last few days seem to be communicating a united front that such disappointing data will not derail the continuation of the taper. We will quickly know if that narrative changes, but for now taper continuation seems to be the definitive plan of action.
On the bond side, the PCM US Bond Index is 25% in each of high yield corporates, investment grade corporates, 7-10 year U.S. Treasuries, and 20+ year U.S. Treasuries. The PCM Absolute Bond Index saw 50% exposure to 20 year US Treasuries and 50% to inflation protected government securities. Due in part to the multi-directional ability of these indexes, the PCM Absolute Bond Index composite was again ranked as achieving "Top Guns" status within the Informa Investment Solutions' manager ranking database; this time for the 3Q 2013 after receiving the award in 2Q 2013 as well. We look forward to seeing if the index achieved the same status for the 4th quarter of 2013. The Absolute Bond Index continues to be a solution to consider for clients who have maturing bonds or high exposure to a bond portfolio with a long duration. To view Morningstar Fact sheets of all of our index models updated through 12/31/2013, please visit our website at www.pcminvestment.com under the "indexes" tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by Co-CIO's Michael Chapman and Todd Wood.
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.