After making solid gains in Q3, the commodity markets weakened significantly in Q4. While the long term trajectory appears to still be trending up for commodities in general, there have been a number of factors we can guess have caused the “risk on” and “risk off” market behavior in commodities: speculation re China growth slowdown, the US election, the so called “Fiscal Cliff”, and many others. These factors may have contributed to the choppy market action in Q4.
After gaining 5.88% during Q3, the ABCERI was off 5.03% in Q4. By comparison, the S&P/GSCI ER lost 3.30% while the DJ UBS ER index lost 6.35%. Since the start of publication in 2010 and calculation by the NYSE, the index has outperformed its peers significantly in absolute return and risk measures.The following table highlight’s the strategies ability to capture the upside while limiting the downside.
As outlined in a report published by ETF Securities (UK) entitled Global Commodity ETP Quarterly, the Auspice Broad Commodity index remains at the top of the global broad commodity index peer group with both the highest return and lowest volatility. Copies of the report can be obtained by contacting Auspice.
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. The ABCERI has continued to outperform most of its peers in 2012 down 1.02% with far less volatility.
In Q4, the ABCERI preserved a small portion of the Q3 gain. All 3 of the sectors gave back during this period with the most challenge coming from Metals and Ags.
After adding Energy commodities steadily in Q3, there were no changes in Q4. The index ended the quarter long Natural Gas, Gasoline, and Heating Oil. The index currently remains without a Crude Oil position. The year ended with the petroleum markets stronger and Natural Gas weaker. Watch for changes in weightings early in the new year as clouds lift from the US election and the “Fiscal Cliff”.
The index holds the same long positions in Gold and Silver added late in Q3. There continues to be no Copper weighting at this time. The Metals sector was soft in Q4 for the majority of the overall index loss.
The Ag sector struggled led by the Grains during Q4. The index exited weightings in Wheat and Corn during the quarter to minimize further downside while holding Soybeans. The weakest of the Grains was Wheat. Sugar was weaker during Q4 and the index remains without a weight while Cotton was modestly stronger and added a long weight early in the quarter.
It is not the stated goal of Auspice, nor the ABCERI to predict future market direction, but rather participate in up-trends while minimizing risk during downtrends. Q2 and Q4 illustrated that as commodities moved sharply lower, the index downside was limited versus other broad commodity indices. Moreover, the erosion in Q2 was more than made up in Q3 as up-trends appeared. While the up-trends in commodity were not sustained in 2012, the ABCERI index was able to minimize the downside with low volatility and drawdown. .
The long side of the index is now represented by 7 of the 12 components and has all 3 sectors represented. This is in sharp contrast to the end of Q2 when only 3 of the 12 components were included. As such the index is now tilted long commodities to take advantage of a potential sustained movement higher in this asset class.
We continue to believe that the long term outlook for commodities remains promising and the overall trend is up. However, years like 2012 highlight the importance of risk management and strategy selection as the downside 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) 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.