Mid-August, 2014: Money flows to U.S. strong across all asset classes
All money flows are pointing to the U.S. As the markets continue to disregard potential geopolitical risks and many macro-economic reports that are less than stellar, the only sign of any positioning that could be perceived as fear in the markets is the move to U.S. assets in any form. In the last couple of weeks, money flow has been strong into both U.S. equities and U.S. Treasuries, as well as the U.S. dollar. Despite being positioned very conservative after the August 1st reallocation, our indexes are holding up very well month to date with bonds, U.S. dollar, and selected international equity exposure carrying their weight. PCM Absolute U.S. Sectors and PCM U.S. Industries are both participating in the up move despite 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 continues to be up strong month to date as it remained fully committed to long equities. PCM Total Return and Stable Growth Plus are both up respectably despite 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, both up very strong. Interestingly, in our analysis, the mix in asset classes that we are seeing in our portfolios now is very similar to weightings that we see in the models in 2007 before the markets began an 18 month downward spiral to the March 2009 lows. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Index remained in inflation protected U.S. Treasuries, and on the equity side U.S. Preferred equities, Singapore and Hong Kong. The Alpha One Index rotated to 7-10 year U.S. Treasuries. PCM Absolute Metals Index now has exposure to cash equivalent and also to palladium, while PCM Commodities Index holds gold and cash equivalents.
On the bond side, credit spreads between junk bonds and U.S. Treasuries recently 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. In 2008, the credit spread was about 20% (high yield corporates vs U.S. Treasuries) and is currently at about 4%. This means that investors are being paid an additional 4% for the risk of default on a corporate bond vs a U.S. Treasury vs the additional 20% they were receiving at the height of the financial crisis. This same scenario of a widening credit spread was one of the first signs of trouble for all asset classes in 2007 and into 2008. The PCM US Bond Index is heavily exposed to U.S. Treasuries. The PCM Absolute Bond Index remained in U.S. treasury inflation protected government bonds, as well as 20 plus year U.S. Treasuries.
****Newly announced performance awards: PCM Index Strategy composites have again been recognized for performance by Informa Investment Solutions; this time for the 2nd quarter of 2014, as well as 1-year trailing performance and 3-year trailing performance. The PCM Absolute Bond strategy and the PCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. The PCM 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 the PCM Absolute Bond and PCM 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 at www.pcminvestment.com under the "indexes" 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.