Market Review
Most commodity markets moved lower in Q2 in most cases eroding any gains that were made in Q1.
Index Review
The ABCERI was down 4.70% during Q2 after gaining 3.29% in Q1. By comparison, the S&P/GSCI ER lost 12.40% during the quarter.
This highlights that exposure to ABCERI provides exposure to up-trends in the commodity markets while mitigating exposure to the downside.
The ABCERI does not attempt to simply track the broad commodity markets or predict their direction, but rather aims to capture upward price trends from those commodities that are making sustained moves higher. While Q2 did not provide sustained upside for commodities, the index effectively limited the downside risk and exposure. The ABCERI has outperformed most of its peers in 2012 down only 1.56%. The ABCERI index ended Q2 with June up 2.24%.
Portfolio Recap:
In Q2 commodities lost some of the ground that was gained in Q1. The weakest sector within the ABCERI index was Energy which started to soften significantly in March. Metals contributed modestly to the softening while Agricultural commodities (Ags) provided some upside led by the Grain markets.
Energy
While the index added long positions in Crude Oil, Heating Oil and Gasoline in Q4 2011 and early in 2012 which provided gains in Q1, the market softened dramatically in Q2. These position weights were flattened during the quarter and the index is currently waiting for a signal. The index currently remains without a Natural Gas position as well despite some of the recent gains. Natural gas has remained in a downtrend since mid 2008.
Metals
The index held the same position long in Silver much of Q2 but has now exited near the end of June. Copper and Gold continue to trend lower and are still without a long position. After leaving 2011 without any of the metals components, the index is again in the same state.
Agriculture
The Ag sector provided modest gains led by the strength in Grains during Q2. While each of the Grains acted in a unique manner and is treated discretely, all have long weightings at this time. Soybeans remain long since Q1 while Corn and Wheat were added during the quarter. Corn was added at the end of June while Wheat was added at the end of May. Cotton, which was exited midway through 2011 continued to experience weakness in Q2 confirming the index zero weight. Lastly, Sugar was also weaker during Q2 and also remains without exposure.
Outlook
It is not the stated goal of Auspice, nor the ABCERI to predict future market direction, but rather participate in sustained up-trends while minimizing risk during downtrends.
After experiencing weakness throughout much of the second half of 2011, the gains made in Q1 were followed by a soft commodity market in Q2. The long side of the portfolio is now represented by 3 of the 12 components and this is only in the Agriculture sector, specifically Grains. As such the index is tilted to a defensive stance of capital preservation and only long markets that show specific opportunity.
Since publication and calculation by the NYSE (September 2010), the ABCERI remains a better absolute and risk-adjusted way to participate in the commodity markets versus traditional long only commodity indices. Through this period, the ABCERI has gained 17.69% with 13.78% annualized volatility while the S&P/GSCI ER had a lower return at 3.84% with a higher 20.59% volatility.
We continue to believe that the long term outlook for commodities remains promising but that downside like in any asset class, needs to be managed carefully and in a disciplined manner. As such, strategies linked to the Auspice Broad Commodity Index, which have the benefit of disciplined risk adjusted participation, may continue to outperform the traditional (long only) commodity peer groups with better upside, lower downside and reduced volatility.
Strategy and Index
The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index, which is considered to be a “third generation commodity index”, considers both risk and reward. The index uses a quantitative methodology to track either long or flat positions in a diversified portfolio of 12 commodity futures which cover the Energy, Metal, and Agricultural sectors.
Auspice Indices utilize dynamic risk management to produce superior risk adjusted performance in a variety of market environments. By dynamically managing the volatility of each commodity, Auspice ensures that no one commodity dominates the index thus maximizing the benefits of commodity diversification. Enhanced contract roll optimization further increases performance. On a risk adjusted basis, the Auspice Broad Commodity Total Return Index significantly outperforms its global peers.
The Broad Commodity index is available in Total and Excess Return versions. The cash return for the total return index will be calculated daily using the 3-month CDOR (Canadian Dealer Offered Rate). The CDOR is the average rate for Canadian bankers' acceptances for specific terms-to-maturity (one year or less), determined daily from a survey on bid-side rates provided by the principal market-makers, including the major Canadian banks.
About the Index Provider
Auspice is an innovative asset manager that specializes in applying formalized investment strategies across a broad range of commodity and financial markets. Auspice’s portfolio managers are seasoned institutional commodity traders. Their experience, trading one of the most volatile asset classes, forms the backbone of their strategy for generating profits while preserving capital and dynamically managing risk.
Auspice Capital Advisors Ltd. is a registered Portfolio Manager / Investment Counsel / Exempt Market Dealer in Canada and a registered Commodity Trading Advisor, pool operator (CTA/CPO) and National Futures Association (NFA) member in the US. Auspice’s core expertise is managing risk and designing and executing systematic trading strategies. Auspice uses its diverse trading and risk management experience to manage 4 diverse product lines. and has been described as a “next generation CTA”, offering strategies in active managed futures (CTA), passive ETFs, enhanced indices and custom commodity strategies.