Tuesday, February 28, 2012

Do It Yourself Model Gaining Ground on Advisers

Do It Yourself Model Gaining Ground on Advisers

What a shock, after not protecting investors from declines in 2002 and 2008 and spouting the same old modern portfolio theory that has never worked, that investors would start deciding to go on their own.

Thursday, February 16, 2012

Was 2011's Most Successful Hedge Fund Actually a Pension?

Was 2011's Most Successful Hedge Fund Actually a Pension

Interesting article in aiCIO about how a Danish Pension fund made 20% in 2011.   Interesting to me in the fact that they use a risk parity approach vs. the traditional asset allocation approach.  One telling quote:

Out of habit, I ask him about what asset classes worked well in 2011? He laughs and says: “Liz, you know it’s not about the asset classes, but the risk allocation…”

Wednesday, February 15, 2012

Reversal Coming?

We are big believers in staying in harmony with the market trend so we don't try to get out at the top, but we do keep track of various signals that tend to be good indicators of market movements.  We haven't seen any of these signals in months, untl today.  Today we saw an anticipatory set of signals without a confirmation, that together are a fairly strong indication of a reversal.  

1. Intraday high prices of the market have increased to a 21 day high while the advance/decline oscillator is negative.  This unusual event is read as a very strong bearish signal that is often  followed by an downward price movement. 

2. The new high/new low indicator has reversed to the downside.  This is a reliable bearish signal that  is often followed by an downward price movement.

3. An upturn in the VIX.

  In this sideways market a downtrend could start shortly. 

Here's a Reality Check for Investors Considering Tactical Funds

Morningstar wrote a critique yesterday about Tactical Mutual Funds.    Here's a Reality Check for Investors Considering Tactical Funds.  While they do make some valid points there basic conclusion that people don’t need to add tactical funds to their portfolios leaves the average investor with the same asset allocation advice that got them crushed in 2002 and 2008 and that has made them no money for the past decade.  This is not surprising of course as Morningstar’s business model is built off asset allocation and traditional mutual funds that fit neatly into a style box. 
They do make some valid points in the article because there are a number of mutual funds and money managers who would call themselves tactical that really are not.  Tactical asset allocation quite simply is about being in harmony with major market trends, moving based on verification—not prediction, being willing to go to 100% cash for as long as needed, and avoiding the large long term loss.   The tactical mutual fund landscape is filled with funds that try to predict markets and funds that claim to be tactical but are only willing to make minor shifts in allocations.   There are also a number of “tactical” funds out there purely because of the marketing sizzle with managers that have no real experience investing tactically.   So there is no wonder why most of these types of funds would have unimpressive performance. 
At the end of the article the advice moves to outright dangerous:
Tactical funds maintaining exposure to multiple asset classes such as MFS Global Multi-Asset GLMAX may be more suitable as core holdings.”
“Clearly, the funds that take advantage of the flexibility to invest 0%-100% of assets in any asset class ought to be viewed as opportunistic holdings and kept to a much smaller portion of a portfolio, so they won't skew an investor's overall asset allocation or subject them to outsize losses if that fund's tactical bet goes very wrong.”
This is actually the other way around.  Funds that maintain exposure no matter what the market is doing expose investors to outsize losses as they ride the market downwards.  The funds that can go from 0-100% at least give investors the opportunity to get out before a bad market turns into a really bad market.
The bottom line is that traditional asset allocation and using the Morningstar rating system to pick funds doesn’t work and hasn’t worked.  It also exposes investors to way too much risk.  True tactical asset allocation that stays in harmony with major market trends would have protected investors in 2002 and 2008 and is the only way to manage money that works.

Friday, February 10, 2012

VIX Jumping

The VIX (volatility index) has jumped 10.4% so far today on a less than 1% pullback on the S&P.  Shows that maybe the pros are getting a bit nervous.

Monday, February 6, 2012

Risk Parity Funds WSJ

Risk Parity Funds-WSJ.com

Interesting article in the WSJ about risk parity funds this morning.  We are big believers in the approach but as the article points out there are some problems---high use of leverage, large exposure to bonds in a low rate environment, not taking macro risks into account. 
To some critics, the funds' assumptions about risk and their use of leverage are lingering concerns. Leverage can backfire on investors if not managed properly. Some watchers also believe the bond rally is coming to an end, which could hurt risk-parity funds' returns as well.
We have developed our own risk parity strategy using tactical asset allocation (expect a research report out about this shortly) that addresses these concerns.  We also use the risk parity concept in a few of our strategies.

Itchy Investors Ramp Up The Risk

Itchy Investors Ramp Up The Risk-WSJ.com

The longer the Fed leaves interest rates low the more it hurts people who save money in CDs and bank accounts. 

The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren't even keeping pace with inflation.
A better choice for conservative investors is to adopt a tactical approach that stays in harmony with major market trends. 

Friday, February 3, 2012

Volatility Responsive Asset Allocation

Volatility Responsive Asset Allocation

Interesting paper from Russell that dovetails on some of our research.  They apply volatility to a fixed asset allocation and find that using volatility to adjust weights between stocks and bonds beats the fixed allocation.  A better approach is to use volatility to switch between a trend following strategy (trend following works best in a straight up or down market and suffers in a choppy market) and a counter trend strategy (counter trend works best in a choppy market and can get hurt in a straight up and down market). 

Emerging Markets Picking Up

  Lately emerging market stocks have been picking up from a relative strength standpoint.  Below is a  performance chart of an emerging market ETF, an international developed ETF, and an S&P 500 ETF.

                                                    1 Week         1 Month    3 Months    12 Months

Emerging Markets (EEM)              2.42%            13.76%      6.13%         -5.54%
International Developed (EFA)      1.28%             7.15%        4.92%         -9.95%
S&P 500 (SPY)                              0.61%            5.69%        7.64%          3.71%

Source: Morningstar