Mid-July 2014, PCM Quant Coalescence
"Risk On" again continues to dominate, as our indexes remained fairly long U.S. equities in the mid July reallocation. All time highs achieved through the end of June include, but are not limited to PCM Absolute U.S. Sectors, PCM U.S. Industries, and Emerging Market Equity, all being indexes in portfolios such as PCM Total Return and Stable Growth Plus; contributing to their multi asset, multi directional allocation. Although we are happy to see these indexes participate on the upside, we continue to be more encouraged in knowing that when this bull market finally runs out of steam, our clients should be well positioned to have the opportunity for positive returns in what could be an ugly bear market. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Index now holds exposure to U.S. equities, technology and healthcare. Energy, healthcare and technology are all strong themes amongst the July reallocation and historically, these are the three best performing sectors in late stage bull markets. The Alpha One Index rotated to U.S. equity exposure, while both the PCM Absolute Metals Index and the PCM Commodities Index went into copper; being a continued validation of "Risk On", as it is an industrial metal and a vote for a strong economy. The PCM U.S. Industries Index and the PCM Absolute U.S. Sectors both hit another all time high at the end of June. The PCM U.S. Industries remains in Pharma, U.S. technology, semi-conductors and consumer staples. The PCM Absolute U.S. Sectors remains in energy, technology, and utilities; here again noting that research shows that energy, healthcare, industrials, and technology are generally the sectors that lead as bull markets approach a top. All of these sectors have been a strong theme in our indexes since the beginning of the year at various times.
It will be an interesting few months, as European leaders grapple with how to hold Putin accountable, while not disrupting energy flow and hurting their own economies. This later problem arises in the last week at the same time war has officially broken out in Gaza and nuclear negotiations with Iran have been extended another 4 months, as the July 20th target date was not met. What we do know is that, as we continually monitor our quant analysis between trading periods and after such an extended period of low volatility and complacency, our observations show that our models will go from long to flat to defensive in a very short period of time.
On the bond side, 10-year treasury yields are again under 2.5%, as the global turmoil takes a slight hold in the markets. The PCM US Bond Index allocations favored U.S. treasuries and higher quality corporates, while the PCM Absolute Bond Index is now in emerging market bonds and U.S. treasury inflation protected government bonds. The exposure to treasury inflation protected bonds is interesting, as both Fed's Yellen and Bullard have started to sprinkle in comments about inflation and the fact that any fear of inflation is currently not priced into the required yield that investors should expect in an inflationary environment.
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. 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.