October, 2013: "Risk On" Favors International
The October reallocation resulted in a decisive rotation out of domestic equities and into international equities, including strong exposure to Europe and more limited exposure to China. PCM's Global Tactical Index rotated to New Zealand, Germany, Spain, France and Austria. After hitting all time highs at the end of September, the PCM US Industries Total Return Index committed 25% each to pharmaceuticals, medical devices, dynamic media, and the insurance industry.
The PCM US Bond Index remained 75% in very short maturity US Treasuries and rotated the remaining 25% allocation from inverse 20 year US Treasuries to high yield corporate bonds. The PCM Absolute Bond Index is now 50% very short maturity treasuries and 50% international corporate bonds, continuing the theme of "risk off" in the US, but not necessarily internationally. Due in part to the multi-directional ability of these indexes, the PCM Absolute Bond Index composite was ranked as achieving "Top Guns" status within the Informa Investment Solutions' manager ranking database for 2Q 2013. We are looking forward to seeing if our Emerging Market Equity Total Return Index can achieve a similar award for third quarter 2013.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by Co-CIO's Michael Chapman and Todd Wood
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.
We hope this has been helpful and informative!