May, 2015: Oil Up, Bonds Down and Equities Volatile
Happy Spring and welcome to better weather! Before we get into the May analysis, we would like to point out 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 May quant analysis!
Bonds and commodities are in the spotlight, as oil rebounds over 45% off recent lows and government bond yields spike worldwide. Some analysts believe the spike in yields on longer term bonds is due to the spike in oil, as investors' fear of inflation kicks in. Other analysts see it as a sign that the situation in Greece may not be as contained as they hope and believe. With respect to commodity prices, they are rising in general as a result of the weakening U.S. dollar. The strength in the U.S. dollar was one factor widely cited as the reason earnings for the 1st quarter of 2015 were revised down almost 10% from late last year's expectations. Our May quant analysis picked up on these themes, as allocations to ETF's that track the inverse of bond prices and ETF's that track a basket of commodities are both represented in the allocation.
The PCM US Bond Total Return Indexsmpicked up on bond weakness, allocating 25% to inverse 20 year U.S. Treasuries. Another 25% remained in high yield corporates and the 50% remaining allocation went into cash equivalent. The PCM Absolute Bond Indexsmalso added exposure to inverse 20 year U.S. Treasuries with the remaining 50% in cash equivalent, as it picked up another "Top Gun" award for performance for the 3 year period ending 4th quarter of 2014 from Informa Investment Solutions.
PCM Absolute U.S. SectorIndexsmstayed long equities with exposure to financials, materials, and energy, as again the commodities theme remains strong. PCM U.S. Industries Total return Indexsmalso picked up materials and financials, as well as media and cash equivalent. The PCM Absolute Equity Income Indexsmrotated to international dividend payers, U.S. preferred stocks and the energy space.
The May reallocation of the PCM Emerging Market Total return Equity Indexsmis invested in the BRIC's, emerging Europe and cash equivalent.
Inverse U.S. Treasuries, materials, energy and commodities in general are all represented heavily in the PCM Total ReturnPortfolio Indexsmand PCM Stable Growth Plus+ Portfolio Indexsm. Both Indexes also hold the Canadian Dollar, which yet again is a commodity play with Canada's large export of oil. (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 energy and Canadian equities, as well as having exposure to Austria and Singapore. ThePCM Global Macro Indexsmis long commoditiesnd Asia and inverse 20 year U.S. Treasuries.
The PCM Alpha 1 Indexsmcontinues the commodity theme, allocating to an ETF that tracks a basket of commodities. The PCM Absolute Metals Indexsmhas 50% exposure to industrial metals and 50% to nickel, while the remained 50% in cotton and rotated 50% into copper, 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 Compositesmfor 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 Compositesmand the PCM Absolute Commodities Compositesmboth won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond Compositesmalso winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 Compositesmwas 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 Bond Strategysm
and PCM Alpha 1 Strategysmare 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 by 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.
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