Auspice Broad Commodity Excess Return Index (ABCERI)
Market Review
The ABCERI gained as commodities continued their move higher, expanding on the gains made in July, a sharp contrast to the start of 2013 The strength was led by Energy and Metals but also included some Grains within the Ag sector. Within sectors it remains important to be agile as individual markets moved away from sector trends including Wheat, Cotton and Sugar.
The ABCERI benefited from the gains in commodity markets, specifically the Ag sector during August.
The index did not participate in all markets that moved higher on the month, given the strategy remains on the sidelines in many markets. Tactical long term position shifts are made based on individual component merit as opposed to sector generalities which continues to lead to better performance over tradition long commodity index approaches.
As such, the downside protection offered by ABCERI as commodity weakened over the last couple years has provided better absolute and risk adjusted returns.
Index Review
The ABCERI gained 1.03% in August to be off only 0.41% in 2013 despite significant long term commodity pressure. The index continues to outperform (see table below) most of the comparable indices on the year. The strategy now holds 5 long components or 42% of the possible basket.
Since the start of publication in 2010 and calculation by the NYSE, the index has outperformed its peers significantly in absolute return and risk adjusted measures. The following table highlights the strategies ability to capture the upside while limiting the downside.
The ABCERI does not attempt to simply track the broad commodity markets or predict their direction, but rather aims to tactically capture upward price trends from those commodities that are making sustained moves higher while protecting capital on those that are making sustained moves lower.
Portfolio Recap:
In August, the ABCERI made gains in 1 of the 3 broad sectors. The strategy made gains in Ags which more than offset the small loss in Energy. There are no Metals holdings at this time.
Energy
Gains were made by holding a weight in Crude Oil put on in early July. However, it was two new Gasoline and Heating Oil long weights that were added near the end of the month that provided a small sector loss. The loss occurred because of the end of month headline effect plaguing the Energy sector. It is important to understand these are long term position shifts and reflects a significant change in positioning over the last 60 days in this sector.
Metals
The index remains without a long weight in Metals although the component markets rallied in August.
While there were no position weight changes at this time, this sector has been softening throughout the year and remaining on the sidelines has been prudent.
Agriculture
The Ag sector performed well in August and led the index higher. While the long term Cotton weight corrected lower for a small loss, the long position in Soybeans was profitable as the strongest component of the Grains made a significant move.
The index remains without positions in Corn, Wheat and Sugar. While Corn did move higher on the month, Wheat and Sugar drifted lower.
Outlook
While the past few years have been challenging for commodities, remaining tactically exposed has proven advantageous given the non-correlated diversification benefits. It is the continued goal of the ABCERI index strategy to minimize the downside with low volatility and drawdown and remain a store of value until upside opportunity presents itself.
The long side of the index is now represented by 5 of the 12 components and has 2 of the 3 broad sectors represented. With careful selection, the strategy has been able to take advantage of those commodities moving higher while avoiding excessive losses in the markets moving lower and remain a store of value despite significant sector weakness.
We believe that the long term outlook for commodities has not changed and remains promising and the overall trend is up. However, given the path is not a straight line, a tactical and risk management oriented approach will be most effective. The recent price movements illustrate that upside may be on the horizon and when taken tactically will provide the best opportunity for success long term. 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 Fund Manager / Exempt Market Dealer in Canada and a registered Commodity Trading Advisor (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.