Love and Economics

More recently than outrageous prices paid by royalty for Pineapples in the days of Columbus ($5000 in current dollars), research by Stanford Professor Baba Shiv illustrates that the brain actually responds more pleasurably to stimulus if it thinks the item is expensive versus cheap. This was illustrated using wine. If you tell someone it is expensive, their brain literally responds more than if they are told it is cheap. 

When we pay a lot for something, we enjoy it more because our brain thinks its better. But as the value, or perceived value fades, our passion fades away.  If something has real virtue and a low price, its perceived value is at risk. Historically, there was a strong correlation between price and value.  The price was driven by the bespoke/handmade aspects of producing goods and commodities. Transportation and communication was time consuming and costly. Technology changed this and now we don’t get excited about cheap things.  Think price of diamonds or caviar versus chicken eggs and flour.

Children offer us a more realistic perspective as they don't yet appreciate monetary aspects (cost).  Hence why a child often plays with the box an expensive toy comes in, rather than the toy itself

Society also seems to shun cheap things and celebrate the expensive. I believe this aided or exacerbated by "brand".  Brand implies quality and thus influences the price we will pay for something. 

This may partly explain why expensive mutual funds from companies with billions in AUM still sell yet new entrepreneurs in the financial space that create other more cost effective products have less assets.   The best move for the mutual fund companies is to try to use their brand to play catch up, with products like ETFs - and it may indeed work. For like expensive things, we are willing to pay more for perceived value from brand. 

At a boutique shop like Auspice, we know we can't compete with big brands. This is especially true given we don't have hordes of salespeople booking hundreds of meetings a day.  However, by creating products of value, for a fair price, we believe the evolution of the buyer will dictate the terms going forward.   The move away from high cost mutual funds to ETFs or low cost funds that reward performance is indeed occurring.

Moreover, the move from expensive financial advisors to Robo-advisors is another example of this.  It doesn't mean the traditional advisor doesn't add value. It means the market may only be willing to pay for the marginal cost of producing the good in the future.  And if the good is cheaper (ETF versus mutual fund), then new buyers may demand the alternative tool regardless of delivery mechanism or historically acclaimed brand.

I love Pineapple. But not at $5000. OK if its not Dole.

Better yet, I love to get a good deal on quality product, even if it’s a brand most don’t know. Yet.

Accretive - in Finance and Life – March 2017

Accretive is a word we use a lot at Auspice.   It is the process of improving something, making it better.  

While adding value gets talked about a lot across aspects of business, consumer products, services and even in the financial industry, it is a little different than being accretive.  “Added value” is about making the product more appealing.   For example, a jewelry business may use high end displays or wrapping. This may make customers willing to pay more for the product. It is an add-on or feature that gives the product a greater sense of value.

If you are an investment advisor, what sets you apart? Perhaps the added value of estate planning, insurance, or cash efficiency can separate your practice from the pack and low cost alternatives, but these things don't necessarily improve the portfolio for your client,— that is a little harder. If you are an institutional investor or think like one, the plan you represent (investor) doesn’t have the same need for the bells and whistles of added value services, but adding unique value to the portfolio is indeed critical.

When people talk about improving a portfolio of assets, we often hear about the added value. Anything that either makes the portfolio provide higher returns, or feel better for the investor could be called added value. Therefore, doing more of the same thing that is working right now (long equity) in a different (high-beta) wrapper is essentially "added-value". When we refer to changes to portfolios as being "accretive", it answers the simple question, "does this improve the portfolio?" This improvement could be in the form of better returns, or just as important, reduced risk (volatility, drawdowns), better risk metrics (Sharpe, MAR, Sortino ratios) or a combination thereof. To do this, the asset needs to be different; do different things at different times than what you were already doing – make gains at different times.  

In fact, the only real reason to add a new "asset" to a portfolio is to be accretive to what you have. Not more of the same. Not an extra policy or feature.  

When you are looking at your portfolio, or the one you oversee, how do you decide to add something new? Does it provide a diversification of risk versus simply a further diversification of capital (see January post on this topic here)  We believe that adding assets should not only be based on the obvious goals of increased returns, but that new assets should be accretive to what you already have.  It should enhance and improve the portfolio. 

This is no different than the walk of life. We are looking for things that actually improve our lives and how we live - in some way benefit society or leave the world a better place.  Like your investment portfolio, sometimes adding shiny things feels great for a while, but they don't matter that much in the end.

Be accretive. Or what’s the point?

The CTA VAI (Value Added Index) - a tool for timing and understanding the value of managed futures

The CTA VAI (Value Added Index) - a tool for timing and understanding the value of managed futures

It seems like clockwork that whenever an investment strategy goes through a soft period of lackluster returns, the investment community questions its validity. You can almost set your watch to it. This seems particularly true for strategies that are divergent in nature, the most common of which are managed futures/CTA strategies.

Divergent return streams are characterized by many small losses followed by an occasional large gain, often at times of crisis or correction. Unlike feel-good convergent return streams, which produce many small gains followed by an occasional devastating loss, divergent strategies often feel like taking many small paper cuts, waiting patiently for a possible large return. For this reason, retail investors often struggle with this type of strategy, as they do not provide constant gratification through dividends or yield, but rather feel like waiting for a huge insurance payoff.  

Seeing as most equity, fixed income and typical alternative (real estate, private equity, infrastructure) investment strategies produce a convergent return stream, one solution to creating a better portfolio, for any investor, is to add divergent alternative return streams to the typical convergent investments that dominate portfolios. Holdings that boast a negative or near-zero equity correlation but still produce positive returns over time are particularly valuable, as they’re able to still provide investors with moderate gains over the short-term, but really kick in once the markets decline.

To help understand the value of this return stream and managed futures in general, in 2014, we published a white paper on the CTA Value Added Index (“VAI™”), which illustrates that managed futures/CTA strategies consistently add risk-adjusted value not only in times of financial crisis, but over the long term as well, and that timing plays a significant role in improving portfolio performance when increasing risk-adjusted exposure.

A perfect example of this is gleaned from the graph above, which shows the additive risk-adjusted value of using managed futures within a portfolio. While the CTA VAI™ largely remained positive for the better part of two decades, in 2014, it briefly dipped into nega­tive territory before fiercely rallying over a short period of time on the back of exceptional CTA performance despite the continued strength of the stock market.  During this time, any investor who increased their CTA exposure was rewarded handsomely for their shrewd decision.

The best time to add CTA exposure is when the value of the CTA VAI™ has significantly dislocated from the S&P 500. This is why it is such a valuable tool to use when trying to time asset allocation perfectly in order to further improve portfolio performance.

At the time the CTA VAI™ whitepaper was written, the CTA sector had softened for three years and the investment "community" began questioning its validity as a result.  However, the paper illustrates that adding CTA exposure to a simple portfolio of equities was still valuable over most time periods. It didn’t matter whether an investor added exposure in a time of financial crisis or when stocks were outperforming: over a rolling 60-month period, the index was mainly positive. This illustrates that whatever the current performance of the CTA benchmark, there is still an additive long-term risk-adjusted benefit to including managed futures within a portfolio. 

Yet, despite the prevalence of long-term gains for portfolios including CTAs, timing shapes performance. Historically, the most valuable time to add CTA exposure is when the CTA VAI has significantly dislocated from the S&P 500 (grey sections in Figure 1 above in 1998, 2000, 2007, and 2014).

In 2016, with very few exceptions (all of Auspice’s products were positive), CTA strategies did not fare well while the equity market marched higher. This led to a widening of the spread between the index and S&P. Currently, the index’s value is still significantly dislocated from the S&P 500, sitting on the low end of the historical range at 1.16.

While this index does not predict the future, we can learn from facts from the past. At this time, the spread between CTA Value added Index and equities is starting to look stretched. Could it widen even further? Of course. However, it is at times like these that adding a divergent return stream seldom harms a portfolio materially, with the potential to help tremendously. 

Capital versus Risk Allocation – what most investors get wrong with diversification - January 2017

There is one aspect of investing that most retail and institutional investors get wrong, a lot, and that is diversification. We see it all the time. While it starts in a place of diligent thought and effort, it is important to recognize that diversification, as many understand it, expresses an old approach to investing that may not actually shield investors as intended. Even though portfolios are typically built on the basis of diversifying capital across assets, this does not necessarily diversify risk. To properly diversify a portfolio, it is important to separate capital allocation from risk allocation – they are not the same thing.

Most commonly, investors believe that diversifying assets across traditional fixed income, equities and non-traditional assets is a smart thing to do. While going beyond geographic diversification makes sense, investors should now realize that the addition of non-traditional "alternatives" are an important consideration when trying to protect a portfolio and prosper over the long term. 

Chart 1 – Capital and Risk Allocation of a Typical Portfolio

So what’s the problem?

Balanced asset allocation, even with a healthy mix of traditional and alternative assets, does not necessarily mean that a portfolio’s risk is diversified. Investors often make a concentrated bet on equity performance even though they have both types of assets due to their generally high correlation to the stock market. Essentially, as referenced in Chart 1, the diversification of assets could still have a significant concentration of equity risk.  

 Just look at this pension fund (see Chart 2). Despite seemingly being responsible and diversifying its assets, the returns it receives from its investments have a very high correlation to the stock market. The pension has lost and made money at the same time as the S&P with a correlation of 0.85 despite having a diversity of capital allocation.

 Chart 2

So why does this happen?  

The reality is, most investments, including stocks, bonds and even alternatives have a high correlation to the stock market. This includes the most common areas of alternatives such as Real Estate, Private Equity and Infrastructure, which have some of the highest correlations to the market. Other common alternatives like High Yield, Hedge Funds, and Equity Multi-Strategy, which typically have been the first stops outside of the "traditional alternatives,” also suffer from this problem.   

Chart 3

Of the alternatives listed in the chart above, only Currency, Commodity, Agriculture and CTA/Managed Futures alternatives have a low-to-negative correlation to the market. While many investors have heard of these asset classes, investing in them may seem opaque and complicated. However, there are a number of institutional offerings for each of these areas that can be taken advantage of, and recently, more and more choices are becoming available to even the retail investor and advisor. The one caveat to this is, in certain markets like Canada, these areas are definitely underdeveloped and used by only the most sophisticated investors, which in our view, is extremely unfortunate.    

Arguably, the most important alternatives of all are the ones with a slightly negative correlation to equities because alternatives are largely intended to shield investors and diversify risk. This is commonly understood to be only available within the Managed Futures space. So what is it about this return stream that adds value to a portfolio yet has a negatively correlated return?

The answer lies in the fact that risk taking strategies can be broken down simply into two types – convergent and divergent. 

 Convergent return streams are most common, producing a return stream that is characterized by many small gains with an occasional devastating loss, as markets grind higher slowly for long periods of time with the risk of a sharp correction. This type of return stream is a “human” feel good strategy, as it gives investors constant gratification, often through yield or dividends, follows logical sense and is based in fundamentals. Whether classified as an alternative or not, the returns experienced under this stream will look a lot like that of an equity market and encompass both active and passive investment strategies. The reality is, most alternatives are this way, and as such, they do little to help your portfolio in difficult times as you get more of the same type of return stream.

In contrast, divergent return streams are less common yet are very valuable as they produce returns differently and at different times when compared to most investments. They are characterized by many small losses followed by an occasional large gain, often at times of crisis or correction. Unfortunately, they are not "feel good" strategies. In fact, to many, they feel like taking many small paper cuts, waiting patiently if possible for gains. These strategies go against the human need for constant gratification and are typically not based on fundamentals in order to produce an atypical return stream.  They are most often based on a repeatable process that is systematic, with fundamentals and no biases, ultimately producing returns that are generally derived from trend following. The most common strategies under this umbrella are Managed Futures/CTA investments.

As one can see, the real solution to creating a better portfolio, for any investor, is adding divergent alternative return streams that have a negative or near-zero equity correlation but still produce positive returns over time.

A better portfolio should be judged from a risk perspective, not just a capital allocation view.  To reduce portfolio risk while potentially increasing the opportunity or reward, the return stream should be accretive to what you may already have. From this perspective, there is no sense in adding more equity risk, as you’ll always land on the same problems when the markets correct

Want to see how correlated your portfolio is to the equity market? It is not overly complicated, all you have to do is run a correlation between your portfolio’s returns and the stock market, then look at the correlation of the components that make up your portfolio. Do you have any that are of low correlation to the equity market?  Hopefully you do. Perhaps you hold a commodity fund, agricultural play, or currency strategy. However, for most retail and institutional investors, this area is often overlooked despite their clear advantages. All you have to do is look at the chart below which illustrates the advantages of adding an investable CTA Index like the Auspice Managed Futures Excess Return Index (AMFERI) to a diverse portfolio of traditional and alternative asserts. The improvement is obvious, with not only better returns, but better risk-adjusted returns with a higher Sharpe ratio and lower volatility and drawdowns. 

The good news is these strategies are now available to both institutional and retail investors through not only private hedge fund structures, but mutual funds and low cost ETFs. 

It is only with these types of additions that one can diversify risk and really take advantage of the unknown while still having the opportunity for gains if the seemingly unflappable equity market keeps rallying – or just as likely – fails and reverses

2016, 2017 and Reducing Risk - December 2016

2016 was a year of volatility inducing events, which caused many markets to move in surprising ways on the back of results that separated themselves from popular consensus or polling. Brexit, the US election, a new OPEC narrative, and the US Fed raising rates were all tough on trends, inducing whips and reversals. Despite this, equities rallied while broad commodities had their first positive year in many, and we are proud to say that all Auspice strategies and funds made gains in 2016.

Despite the irony of Trump’s glitter, gold lost its luster, the US dollar soared, and rates rose. This all came after oil rallied for most of the year, copper became king, and natural gas moved over 50% from its lows even though many called it a dead market. Notably, WTIrose 85% from its January lows while Canadian oil, the largest foreign supply barrel to the US, rallied from 15.76 to 38.59 (as per the Canadian Crude Index Reference Price), gaining 145%. The stock market even remained unstoppable after an unlikely presidential candidate was elected to power. Canadian equities led the world, rising over 17% in 2016, which was the biggest increase since 2009, and the US market was on fire with the S&P500 gaining 9.5% on the year.

If the year has taught us anything, what stands out is being different and not following the pack in consensus or action. While typical "hedge funds", as ironic as that sounds, struggled, not all were negative. Our CTA and commodity investment strategies were positive this year, continuing to outperform at key times in 2016 when other CTAs underwhelmed expectations. The reason for this is because, at Auspice, our business model is different, our culture is different and thus our returns are different. We are very proud of these differences, results and added value. However, what makes this year such an accomplishment is how hard it was to achieve success given the unforgiving market conditions. Many CTAs were not up - not even close. To be successful, it took character and resilience, along with agility and rock-solid risk management.  

Looking forward, 2017 seems like a year that will be full of political risks and surprises. With elections coming in the Netherlands, France and Germany, and a clear lack of reliable polling, the populist movement is providing volatility from a seemingly unlikely place. Oil supplies are vulnerable to political risk, as production is concentrated in a small number of countries, many of which are unstable. Domestic turmoil and conflict have disrupted supply from Nigeria, Libya and Venezuela in the last year, while the oil-producing Gulf States and Iran are politically and militarily tense.  Moreover, with the approval of a pipeline to the west coast, for the first time in history, Canada has gained approval to move oil to tide waters and find new buyers in Asia instead of dumping 99% of its exports into the US. Essentially, the markets appear in for an unknown path.

So how do you capitalize on this? Maintain the course and stay disciplined. We think it is critical to be agnostic and remain tilted to the opportunities that the commodity and financial markets provide. While no one knows where the markets are headed, we will continue to simply be trend followers. This will be a year that starts with a bang due to an unbounded number of political narratives globally. Therefore, it will be important to separate capital allocation from risk allocation. If investors continue to focus on proper portfolio construction, the environment could be very profitable.

While portfolios are typically built by diversifying capital across different assets, this does not necessarily diversify risk. Often, we see seemingly diversified portfolios that are really just a concentrated bet on the equity markets due to their high correlation and volatility to these assets. While these portfolios look diversified, even using typical alternatives such as infrastructure, real estate and private equity along with "hedge funds", they tend to be overweight on equity risk by 80-95%. In fact, most "alternatives" have a high correlation to equity, which is why one should really research potential holdings, especially in the new year where it will be important to do the right thing instead of  the same or easy thing.

To really take advantage of the unknown, we suggest adding strategies with a low, or ideally, slightly negative correlation to equities. By our analysis, this is limited to currency, commodities, agriculture and CTA/managed future alternatives with the only negative correlation being the latter. It is only with these types of additions that one can reduce risk while still having the opportunity for gains if this seemingly unflappable equity market keeps rallying -- or just as likely -- fails and reverses.

All things come to an end. That’s what 2016 really taught us, and that is all you really need to know for 2017.

Good luck.

Trump and Natural Gas – the similarities - November 2016

There are a number of similarities between Donald Trump and Natural Gas.

Not only are both a surprise, seemingly sneaking up on us this year to rise to prominence, but like the rhetoric espoused by the president-elect, gas is plentiful and will not go away anytime soon. Even with the odds stacked against them; both have managed to make significant headway in a seemingly improbable, if not impossible way, leaving many bewildered to say the least.

Natural gas is the commodity I started my career on. Some may be surprised by that, but the reality is that it’s a commodity that teaches you risk management and respect for the markets like no other. Gas helps you to remain agile in your thoughts and views as much as your trading discipline. You need to think outside the box, and cannot solely rely on historical performance, because the commodity can move faster and further than you’ve ever imagined.  

I remember when people saying that gas could never surpass $5, $7, $10 or even $12, but it did. Even after it defied all expectations, they said it could never fall back down to $2, but it did as well. Like Trump, many investors are generally unable to fathom gas’ trajectory simply because they act on emotion and do not recognize, or simply choose to dismiss, the underlying momentum propelling the commodity further.

This is why the commodity can be so helpful in teaching investors the value of momentum and trend. Gas makes you learn when to take your chips off the table when risk gets out of line, and can often remind investors that any trend can have its fair share of bumps along the way. When this happens, the best possible recourse is usually to be patient and give your holdings space, looking at them objectively and not allowing emotion to enter into the equation. This is not unlike the Trump campaign, which had momentum on its side, yet had to resiliently hang on through many rough patches in order to secure a win at the end of the day.

When looking to the commodity, given that we started the winter season without weather to support price, gas corrected sharply in October. While this was not unexpected or unhealthy seeing as gas rallied for the better part of 6 months, the news led many to say that winter was over before it even began, causing some to dismiss the commodity altogether. Yet, what happened? Gas continued to hang on despite the bearish news.

At the first sign of winter, the commodity rallied sharply, gaining over 25% since early November. It was simply too early in the heating season to throw in the towel. As always, winter will come, and like Trump, many may not like it, but it is a reality. We just have to deal with it and try to use the underlying trends to our advantage.

Now, with high storage levels, the nature of the gas market’s underlying balance is completely different than it was a year ago. The U.S. domestic supply is currently running close to 2 Bcf/d lower, and demand is also somewhat different with gas-fired power generation more entrenched, industrial demand picking up, and exports of LNG ramping up. Furthermore, Bentek released a study which suggests that if there is no rebound in northeast drilling activity in 2017, northeast gas production may be more than 3 Bcf/d lower than current output levels next year.

So how do you take advantage of this? At Auspice we believe if you have a view on a commodity, find an instrument to express that view directly and cleanly. For this, we recommend commodity-based ETFs, the easiest and most effective way for most investors to express a “pure play” opinion. If you have a view on oil or natural gas produced in Canada, the largest foreign supplier to the United States, pick an ETF that exposes you solely to that commodity.

The rewards may be there – if you look at the performance during the summer season (April through October), the Canadian Gas Index (CGIER) rallied over 36%. While some resource based “gassy” equities have performed as well or better than the commodity itself, these are few and far in between, and can be very hard to distinguish given that they are tied to a myriad of other factors. Even well regarded products like junior natural gas producer ETFs underperformed the commodity itself during this period given their other non-commodity related characteristics. 

How does this all relate to Trump? While his performance as President is yet to be determined, and he has shocked, surprised, and exploded into reality, make no mistake, he isn't going away. Just like trends in gas, it is important to understand reality versus rhetoric and adjust your plans accordingly. Don't simply hide and ignore the information right in front of you. This can hurt you.  If you have a view, take it square on and manage the risks accordingly. All it ever needs is a catalyst to explode!  

Election risk management and liquid alternatives - October 2016

In July, we spoke a bit about what a Donald Trump presidency could mean. As we noted, his candidacy has massive implications both socially and for the markets, but we are not sure of what they are.

While this sounds like a non-answer, we think it is accurate. To be fair, we did say that we felt he had a very real shot at winning. While this surprised some, to be clear it is not based on our political view (we are Canadian after all), but is simply based on statistics, history, and the reality of "dark horse" candidates.

In the final days leading up to the election, candidates say whatever it takes to garner attention, and in some cases, with complete disregard to the constitutional possibility. What’s said on the campaign trail and what plays out in reality is, of course, a whole different matter.  Once candidates take office, many realize that they aren't able to do what was promised, leading to a common electoral phenomenon of inaction. After all, the old saying has never been, "trust politicians to keep their promises.”  It is only once there is a winner, that we will be able to dissect campaign rhetoric from reality.

What does this mean for portfolios?

Regardless, while we offered possible implications for commodities such as metals, agriculture and energy, when it all boils down, the most relevant driver is fear.  As with any unknown, especially one that has the potential to instill widespread change like the impending US presidential election, investors can get spooked and sentiment may be adversely impacted. This could create volatility in equities, and even safe havens like gold. Energy and industrial metals are not safe either depending on which candidate’s policies and plans become realities (or at least become clear...).  At the end of the day, a surprise either way may create market corrections or large moves, depending on the liquidity available as many market participants will undoubtedly bide their time and watch from the sidelines.

 So what is there to do? The answer is the same as always: risk management. 

If your portfolio has high market exposure, you have no choice but to roll the dice and wait. If you are concerned, you could always exit exposures and increase your cash position. But the best recommendation depends solely on your level of protection.

If you have exposure to non-correlated alternatives such as CTA or managed futures funds, you may be in the best position seeing as you are able to generate returns regardless of market direction, and especially in times of volatility. If not, don’t worry, it’s not too late. While many funds only offer access monthly, anyone can buy so-called "liquid alternatives" at any time.  To get immediate exposure, there are both ETFs and 40 Act Mutual Funds that can be accessed daily. We are happy to point you in the right direction in Canada or the US as this is precisely why we exist:  to create easy access, liquidity and risk management in the face of unknowns.

Sometimes, it’s okay to play defense, and non-correlated liquid alternatives are an ideal way to access these tools and increase your portfolio’s resilience in short order. 

Investing in your view - September 2016

Are you investing in the right thing?

When investors, analysts, and prognosticators talk about their market views, they often reference the underlying "good" that is produced.

For example, they tell you that if you are bullish on the outlook of handheld technology, you could express that in Apple. Have a view on electric cars? Perhaps Tesla could be of use. Think that you know where the stock market is headed directionally? An index ETF representing an overall stock market may make sense.

However, where this falters is when one has a view on a commodity. Too often we hear views on the price of oil, gas, and gold expressed by taking a position in a corporation's stock that produces the commodity. This is a very dirty way to express the opinion. 

Why?

There are countless examples of commodities rising or remaining stable while a stock falls.

The reality is that the performance of a commodity producing company is affected by many outside factors that could significantly impact their stock price. These include overall stock market correlation (beta), production costs, hedging policies and practices, organizational structure and competence, debt/equity financing, land positions – the list goes on.

Yet, what affects the price of a commodity future or ETF? Only the commodity itself. Supply and demand in addition to technical elements of momentum and volatility play into this, but there are no other extraneous factors. 

So what does this all mean?

If you have a view on the quality of a management team or the land holdings of an oil company coupled with a view on the direction of the stock market as a whole, invest in the company’s equity.

If you have a view on a commodity, find an instrument to express that view directly and cleanly.  We recommend commodity-based ETFs, the easiest and most effective way for investors to express a “pure play” opinion in commodities.  If it is a view on oil or natural gas produced in Canada, the largest foreign supplier to the United States, pick an ETF that exposes you to Canadian Oil or Gas – the commodity.

Rule of 72 - August 2016

Want to know how long it takes to double your investments?

Look no further than the old “Rule of 72.”

While no one has a crystal ball, this metric helps to figure out the length of time required to double your money at a given rate of return, reflecting the power of compound interest. All you have to do is divide the rate you want to achieve into 72.

Recently, I heard two people talking about this – a client telling me their goals, and a close family friend teaching my children about the rule. For my client, they wanted to double their nest egg in the next 7 years, implying that a 10% annual rate of return was needed. For my kid, they wanted to double their money in the next few months.

While my child’s aspirations are not possible without the binary risk of a roulette wheel, my client’s – despite being quite tough – are. However, it is important to note that while any one investment could theoretically achieve this, the risk is quite high.

If you manage to time things perfectly and pick the bottom of the stock market for instance, you may come close. The S&P has given investors an annualized return of over 13% since February 2009. Yet, if you go back prior to the financial crisis (January 2007), investors had to endure a 50+ % pullback, generally receiving returns in the range of 4.5% instead. Historically this has happened many times, and it is important to remember that when looking to the future, a 50% drop in value requires a 100% gain to break even.

So while doubling your money in 7 years is an ambitious yet achievable goal, is it prudent given the sheer amount market risk taken on? The answer is yes. Through proper portfolio diversification and the use of non-correlated investments, investors can achieve this lofty goal while protecting themselves from market volatility. For illustrative purposes, solely adding 35% of a commodity trading advisor (CTA) index such as the AMFERI (Auspice Managed Futures Excess Return Index) to the S&P gets you half of the way back to the goal at 7.4% annualized while also reducing the drawdown from 52.5% to 23.7%. This is but one change one that could help investors eliminate the risk of an insurmountable yet all too inevitable pullback.

Our advice? Not all diversification is the same. You need more than the long-term, low or non-correlated investments that are generally talked about within the industry. An investment strategy and portfolio requires negatively correlated products as well, especially at certain points in a cyclical market. This is what CTAs and Auspice do – provide investors with products that offer solid performance in times of need. It is our goal to continue to provide this benefit going forward into the unknown of the fall of 2016.

What is Trump? - July 2016

In the long list of market unknowns, Donald Trump and the US Presidential race is a “known unknown.” His candidacy has massive implications both socially and for the markets, but we are not sure of what they are.

The word “trump” has always held significant meaning. In cards, it outranks all else, and in life, it is used to show that you have an advantage over others.

As a surname, Trump is of English origin and has historically served as an occupational name for a trumpeter (from the Middle English trumpe or “trumpet”), which is an apt description for Mr. Donald J. Trump if you think about it. Since announcing his candidacy, Trump and his stances have taken centre stage both in America and abroad.

For America, and the world, the last name Trump is more than a word or strategy. Despite the criticism that invariably follows his comments, his campaign is no longer a political diversion. Simply put, he has a very real shot at the presidency.  But should anybody be surprised?  Like him or not, the man is savvy. He is adept at connecting with the masses through social media, and the nicknames he gives his opponents stick (i.e. “Lying Ted” and “Crooked Hillary”). While some may debate the appropriateness of his morally-grey strategy, his appeal to a wide range of Americans is no longer at question – whether you personally agree with his perspective or not.

It is difficult to gauge the effect that a Trump win would have on the financial markets given his reliance on rhetoric, and his lack of a decisive policy or plan at this time. The degree of uncertainty he has introduced to the world is high, and the domestic and international upheaval it may create is concerning.  As a result, it is highly likely that the ongoing volatility experienced across both the financial and commodity markets will continue for quite some time, and may even intensify.

In the long list of market unknowns, Trump and the US Presidential race is the unknown. The result of the election may have massive implications on the markets, even if we are unsure about what they are. When looking to commodities, a weaker US dollar will drive prices higher, but this may be offset by concerns over a slowing US economy. More broadly, a Trump win could have the following effects on specific markets:

• Equities: given the high level and multi-year rally, along with and artificially low VIX level, we expect significant volatility.
• Precious metals – likely to remain positive, reflecting heightened uncertainty and geopolitical risk.
• Industrial metals – investors may become bullish as it is expected that Trump would call for increased spending on infrastructure.
• Agriculture – prices of vegetables could rise if strict immigration policies affecting illegal workers are implemented, while the effect on global grains is difficult to determine.
• Energy – prices could go either way, depending on Trump’s protectionist agenda and political policies.
• Canadian Oil – as the largest foreign supplier of oil to the US, Canadian crude may continue to increase in importance given Trump’s desire to secure a safe supply for America, and his pro-pipeline agenda.

While Trump wants America to be energy independent, a Canadian supply of crude should be looked at favourably when compared to other sources. Moving away from Mexican and other South American heavy sour crude suppliers would provide advantages beyond safety and ethics. Pricing for these imports are not generated by transparent, open market systems, but rather set by their respective governments.  As such, risk mitigation tools like hedging are simply not available to market participants as they are for those who purchase Canadian oil.

As in life, you can only use a trump card once, and often as a last resort. Donald Trump has a very real shot at being elected because many voters see him as exactly that – a last resort. He has only one chance at this. Like Ross Perot, there will likely not be another run.

Donald Trump is clearly good at blowing his own horn, and a Trump presidency would certainly herald a period of significant volatility for the world’s commodities and financial markets.

Have a Plan - Jan 2016

'Everyone has a plan 'til they get punched in the mouth' - Mike Tyson, boxer

If you have ever had the good fortune to have visited Calgary before, you will know that weather forecasts stretching out much further than the next day are suspect at best. So when planning a day out, one is best advised to bring plenty of layers along…just in case.

Today’s economic climate demands the same levels of preparedness.

In January 2016, the S&P 500 dropped from 2044 on Dec 31st to a low of 1812 on Jan 20th and back again to 1940 by month-end. Intra-day swings unheard of a year ago have now become commonplace. The Fed ‘put’ has been put to the test.

By now, the pattern of ‘rescuing’ equity markets from precipitous drops has become fashionable and have spared many an investor from facing the harsh reality that at some point, the markets’ first responders may simply not show up.

What to do then?

Well, by then it will be too late. We suggest preparing portfolios in advance by having exposure to strategies that have the ability to preserve capital and generate positive returns in sustained negative markets.

The plan that works? Avoid getting punched, be patient and punch back.

What We Learned in Asia - Dec 2015

We recently toured Asia on a trip with AIMA (the Alternative Investment Management Association), which served not only to teach us much and open our minds, but validated our points of view on many things.
 
With respect to commodities and general investment, we have always believed that the time horizon for Asia (particularly China) isn`t the same as the North American investment timeframe of 3, 5 or 7 years. It is more like 33, 35 or 37 years, and this is exactly what we saw and heard from people on the ground throughout Asia including officials from the Hong Kong Exchange.  This sentiment was summed up brilliantly some time ago by the CEO of CPP, one of the largest and most respected investors in the region, who said: 'we don`t think in terms of quarters, but quarter centuries'.  
 
In response to their own significant investment in the region, one senior official highlighted they 'like to focus on the demand side of the equation long term'. We agree. The current state of commodities is oversupply, which is more favourable than a lack of demand because supply can adapt more quickly to falling price - and it has.
 
Based on our time in Asia, noting there are 300 to 500 million middle-class investors, we believe that the question is not whether demand is there or not, it is what impact this demand will have on the price of commodities and general investment in future. Keep your mind open.

"Buy when there is blood in the streets" - Nov 2015

You may wonder why we've summoned up that old Baron Rothschild quote now - after all, several equity markets have seen jaw-dropping gains in October and the market pressures in August and September are increasingly looking to be a distant and unpleasant memory.

It is because some of the market's greatest diversifiers and effective inflation hedges have been bloodied. And it may be time to rediscover the beneficial, long-term impacts that they can have on a portfolio.

Adding commodity-tilted exposure at this stage may sound like a risky proposition, but over the long run, the opposite has been more accurate. As a general asset category, it offers several portfolio benefits worth remembering - its low correlation to financial assets, its inherent inflation-fighting properties and its protective capabilities against global event risk. 

We are not making a 'call' on commodities (though we are bullish on their long-term prospects). Rather, we believe that commodities should form a permanent, strategic portfolio allocation. And while tactical considerations are important (timing, weighting, etc.) that role is best played by managers possessing specific investment expertise.

To learn more about the role that commodity exposure can play in successful portfolios, we invite you to read our recent research piece entitled "Are commodities still a valid inflation hedge in this low price environment?" by clicking on the image below.

A Rising Tide - Oct 2015

Last month, we had suggested that the market winds were beginning to strengthen and that we were poised to take advantage of them if they became more sustained, regardless of their direction.

That shift did begin to occur, enabling us to deliver a modest, positive gain in a month that was sharply negative for many asset classes (including equities) and capitalize on several short-term, negative market movements (see charts).

This uneasy market juncture provides a superb opportunity to assess the fitness of the managers that you have added to your crew. It is easy to lay claim to genius when tailwinds are blowing (as it has in the last several years), but does the same hold true during market turbulence? Did the managers you chose deliver the diversification benefits that you were expecting, or did their performance echo that of the broader market? How did they perform in 2014? Or in 2008?

Carl Icahn, David Stockman, James Grant and scores of others are expressing growing concerns about developing headwinds. If they are right, be sure that you have a crew with proven experience winning in those environments.

After all, a rising tide floats all boats, but are you prepared if the tide goes out?