We’ve seen several articles about “return stacking” over the past couple years - an approach to alternative investing long embraced by institutional investors that’s increasingly available to retail investors.
Indeed, at Auspice we have long offered (and advocated) for this approach with institutional investors, and in 2020 we made this strategy available to all investors through the Auspice One Fund.
What exactly is return stacking, why should you consider it, where does it fit within a portfolio, and how has it performed in the recent environment? This month’s blog provides an overview. Read More.
Risk Management is Key
If you have chatted to us or read any of our material over the last two years you understand we have been very bullish on commodities. Across the board, from unprecedented fundamental supply shortages to long-term technical indicators – we firmly believe we are in the early innings of a commodity supercycle (see May and March blogs for more). You simply cannot fix the supply issues overnight and raising rates does not change that.
That said, where there are significant rewards – the benchmark GSCI TR has now outperformed global equities since 1970 (see Appendix A) – there is also significant risk. Read more.
Commodities, Currencies, and Inflation
We can’t change the past, but we can plan for the future. As such, lets explore three things: 1) The relationship between commodities, currencies and inflation, 2) Central bank solutions, 3) Are you too late? Read more.
The End of an Era?
For retail investors in particular it has been a tremendous, unprecedented period of returns. Not only has the 60/40 portfolio thrived, but so too has real estate. If we look at various regimes, or themes that characterized 3-5 year periods, the current inflationary regime that began in 2020 marks the first departure from consistent stock/bonds/real estate returns since the Global Financial Crisis (GFC). Read More.
Commodity Supercycle - Second Inning
As depicted in Chart 2, from 1970 to 2007 the benchmark GSCI Commodity Index outperformed both the SP500 and MSCI World. With equities valuations at historical highs and commodity supply at record lows (see last month’s blog) we believe commodity outperformance vs equities will be even more significant this decade, maybe even a generational opportunity, eclipsing the outperformance experienced 1970 – 2010. Read More.
Ukraine – Commodity Importance, Backdrop, and Investment Implications.
February was volatile and any sanctions or coordinated responses may pose long term market ramifications. However, the Russian invasion of Ukraine mostly accentuated underlying fundamental themes already in motion:
We’re in a structural commodity deficit that may affect markets broadly for years.
Gains in commodities versus weakness in equities suggests cyclical rotation is underway.
Bitcoin as an Inflation Hedge
April 2021 was the first time in the last decade inflation (US CPI) came in significantly above the 1-3% “normal” rate we became accustomed to aligning with the FED 2% target (see Chart 1 below). Inflation is currently at its highest levels since the 1980’s, CPI YoY recently reported at 7%. Since the April 2021 inflation surge, the most inflationary period of the last decade, Bitcoin is down 34.8%.
New Year. New Regime. New Playbook.
2021 reaffirmed that the onset of COVID has clearly marked a new macro regime of rising inflation, rising interest rates, and elevated volatility. This decade already looks markedly different than previous.
Using leverage to reduce risk
In November investors learned of some of the biggest macro blow-ups in years. Rokos, Alphadyne, Element, Odey and some of the largest macro hedge funds have suffered 15-50%+ losses YTD with many double-digit losses in June and October (see references for more). Contrast this to Auspice Diversified: in 15+ years, in which there’s been multiple corrections and crisis, we’ve never exceeded a 26% drawdown (and are up over 11% in 2021).
Commodity Futures and ESG
To date there has been little discussion about commodity futures within ESG frameworks - neither the Organization for Economic Cooperation and Development (OECD) nor the UN Principles for Responsible Investment (UNPRI) provides comprehensive guidance on commodity futures. We have researched this and will be sharing a comprehensive white paper “Commodity Investing in the Age of ESG and Inflation”. This month’s blog summarizes one of the white paper’s core considerations, that futures offer exposure to commodities with zero environmental impact.
Equal Versus Fair
I often find analogies applicable in investing from other parts of life. Many come from general business and entrepreneurship, some come from life lessons. Some are well known and may even seem cliché, and some are more esoteric, the kind you learn the hard way.
A classic quote is that "Fair isn't everyone getting the same thing, fair is everyone getting what they need in order to be successful". In some ways I agree, in some ways I don't, but in the case of being successful in life and business, it is important to recognize people all bring different talents, experiences and even potentials. If we treat everyone equal, where everyone gets the same, it is a recipe for mediocrity, or even failure as depicted in the picture.
Institutional Investors Adding Commodities - Big Time
"Ontario Teachers' Pension Plan looks at commodities for hedge against inflation. Teachers' net investments in commodities accounted for 12 per cent of the asset mix in the first half of the year, up from eight per cent at the end of 2020".
According to one database there are currently over 40 active commodity searches with institutional investors. A separate study of over 150 European institutional investors and wealth managers with a combined AUM of $USD 293bn found that “Over two thirds of institutional investors (67 per cent) expect the level of allocation into commodities to increase during 2021 and a further 32 per cent expect it to stay the same”.
Inflation - What’s an investor to do?
Gold has struggled for a year now, energy stocks sold off almost 12% in July, and rates have dropped for the last three months despite record increases in CPI and other inflation metrics. What’s an investor to do?
Stagflation?
While some economists continue to cherry pick various data points to suggest that inflation will be transitory, there is an increasing amount of big picture thinker skepticism.
"If our solution is entirely just to get a green world, we’re going to have much higher inflation, because we do not have the technology to do all this, yet,” - Larry Fink
"The stagflation of the 1970s will soon meet the debt crises of the post-2008 period. The question is not if but when." – Nouriel Roubini
Bitcoin Myths
We may be adding bitcoin to some of our portfolios. While exciting and topical, to us it's just one more non-correlated market. Like all markets we're agnostic and will trade both long and short. At present it looks like the trend is down and we may be getting short. If the price trend reverses, we will be long.
We are concerned however with certain myths being bandied around about bitcoin.
Foundations
We thought we would provide some clarity on what we do at Auspice, and why our approach may benefit your portfolio. We have made it clear for years that:
We are a "commodity tilted" manager – We feel this has been a very undervalued area in its price and appreciation for portfolio value for many years.
We are not fundamental discretionary – We are technical and systematic.
We are uncorrelated to commodity indexes (and negatively correlated to equities)(1).
Let’s dive into the "how" and "why".
Commodities only go up
The idea that commodities will only go up is laughable. One doesn't have to look beyond the last decade to appreciate that.
Same goes for the David Portnoy social media "stonks only go up" ideology that's in part been driving record retail equity speculation. In the 1990s it was taxi drivers and barbers sharing hot stock tips, today it's @stoolpresident Davey Day Trader (David Portnoy) and 20-year-old self-proclaimed YouTube/Reddit/meme stock experts.
After 11 consecutive months of commodity gains, we finally had a negative month in the Auspice Broad Commodity index (the broad comm indexes weren’t all up for 11 months in a row, only ABCERI was).
A 587% Return
586.56%. That’s what the S&P GSCI Total Return commodity index, the longest standing commodity index, returned in the 1970s. Compare that to 17.25% (total cumulative) for the S&P 500. That is a 21.25% annualized return for commodities versus a 1.6% annualized return for equities.
But we don’t think this is an anomaly, the last decade is. From 1970 until the global financial crisis equity peak (December 2007) the S&P GSCI returned 7367.75%. Over that same period the S&P 500 returned about 1/5th of that, or 1495%.
Commodity Realities
One of the first things you learn about the markets as a trader, is they can stay irrational longer than you can stay solvent. As a trader at a conservative Canadian bank, minding the bank roll was key- risk one to make three. As stocks dominating today's headlines can deviate from rational valuation (Gamestop, Tesla, AMC etc) due to systemic flaws, commodities can do the same. Was crude oil fairly valued at $147 per barrel in 2008? Was it worth less than $0 in April 2020? Not likely. But the market will do what it wants and investor psychology, fear, greed and panic can definitely move markets beyond fundamentals - yet only to a point.
Happy New Year. No Apologies
What a year. At Auspice we have never apologized for making money in crisis. Sorry, that's the job. In a classic "hedge fund" way, we often make gains when other things are losing. This often occurs in crisis, volatility and when there are problems like war, famine, strife, and yes, pandemics. While we hate the analogy, its a bit like insurance, paying out when bad things happen. And they do indeed happen. Boy did they happen in 2020.