Typically, when something is on sale, it means that the item is offered at a discounted price for a limited time. This is done to pique the interest of buyers and ramp up demand because everybody, no matter how well off, loves a bargain. It’s straight retail gospel.
In the world of investments, we often hear that a stock is "on sale" or "lagging" because some factor has pulled its price down. Usually, this is temporary in nature, seeing as the company's business or overall strategy remains solid, causing most retail and institutional investors to get excited. Just like being at the mall, when investors find a sale on a stock, they want to buy it. It is irresistible because the sale is perceived as being of good “value.”
Yet, when looking at investment funds, this phenomenon seems to lose its magic. Instead of clamoring to buy, when a fund temporarily loses its value, investors often question what’s wrong. What’s wrong with the manager, the strategy or investment thesis; they question the very fiber of the investment. While this is absolutely within their rights, and part of sound investment strategy, the question is, why does this typically happen to investment funds?
Just like any item, there are ideal times for a fund, and times that are going to be challenging. All investment strategies have periods of highs and lows. When looking at long funds for instance, there are going to be down periods when the market corrects, and long/short funds can face strong headwinds when markets whip up or down. At times, trends and volatility are even less than ideal for quantitative funds that are agnostic to price direction or asset type.
However, the benefit of investment funds is clear: they are generally based on sound risk management. Not only are most more balanced bets beyond a single stock or sector of the market, but the risk controls in place typically prevent the massive losses that you see in single stock investments. Simply, most funds do not have pullbacks as deep as single stocks or equity benchmarks. For instance, while the S&P's worst pull back is 53%, the Barclays Hedge Fund Index and BTOP50 CTA Index have only ever experienced a dip of 24% and 14%, respectively.
So, just as before, when you see an investment fund pulling back, consider the following:
· Is the investment thesis valid;
· What has challenged the strategy;
· Is the strategy no longer valid or is this likely temporary;
· Does the strategy have solid risk controls in place to control pullbacks/drawdowns; and
· Does the investment provide good value?
If you are comfortable with the answers, perhaps this time categorize it as being “on sale.” Rather than chasing returns, chase good strategy and management, and if you find it on the cheap, all the better.
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
Auspice Broad Commodity Futures Excess Return Index (ABCERI): The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is tactical long strategy that focuses on Momentum and Term Structure to track either long or flat positions in a diversified portfolio of commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess return (non-collateralized) versions.
Returns for Auspice Broad Commodity Excess Return Index (ABCERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.
The Bloomberg Commodity (Excess Return) Index (BCOM), is a broadly diversified index that allows investors to track 19 commodity futures through a single, simple measure. Excess Return (ER) Indexes do not include collateral return.
The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.