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The Best And Worst Of February: Managed Futures

Managed futures mutual funds and ETFs had a strong month in February, with the average fund in the group returning +1.77% while the S&P 500 Index dropped 0.13% and the Barclays US Aggregate Bond Index gained 0.71%. Most funds generated positive returns for the month, and the top three funds gained between 3.67% and 6.34%, while only two funds in the entire category lost more than 0.88% in February. Top Performers in February The three best-performing managed futures mutual funds in February were: The PIMCO TRENDS fund was the category’s top performer in February, gaining an impressive 6.34%. Unfortunately, the fund – which debuted on the last day of 2013 – was still down for the year ending February 29, with one-year returns of -2.93% ranking it in the bottom 37% of its category. The fund’s one-year beta, relative to the Credit Suisse Managed Futures Liquid Index, of 0.60 was roughly in line with the category average of 0.66, while its one-year alpha of -4.27% compared unfavorably with the category average of -2.60%. PQTAX’s one-year Sharpe ratio through February 29 was -0.23, compared to -0.01 for the category as a whole. The SFG Futures Strategy Fund ranked second among managed futures mutual funds and ETFs in terms of February performance, with monthly gains of 3.92%. But like the PIMCO TRENDS fund, SFG’s Futures Strategy underperformed for the year ending February 29, returning -3.93% and ranking in the bottom third of the category. Its one-year beta and alpha stood at 0.75 and -6.38%, respectively, giving it a Sharpe ratio of -0.37. Of February’s top-three performers, the Altegris Managed Futures Strategy looked best beyond the past month’s performance. Its February gains of 3.67% contributed to its one-year return of +4.75% through February 29, ranking in the top 20% of the category. The fund, which debuted in August 2010, had three-year annualized returns of +3.71%. Its one-year beta of 0.81 indicates a relatively high correlation with the Credit Suisse index, but its alpha of 2.21% and Sharpe ratio of 0.48 highlight its outperformance. Worst Performers in February The three worst-performing managed futures mutual funds in February were: Dunham’s Alternative Strategy Fund was February’s worst performer in the managed futures category, returning a dismal -3.25%. DNASX’s underperformance has been enduring, as its -11.92% one-year returns through February 29 ranked in the bottom 8% of the category. Its one-year beta of -0.20 indicates it has very low (modestly inverse) correlation to the Credit Suisse index, but this favorable feature is overshadowed by the fund’s -11.26% one-year alpha. Its one-year Sharpe ratio, a measure of risk-adjusted returns, stood at an abysmal -2.29. The First Trust Morningstar Managed Futures Strategy ETF was the only exchange-traded fund among the top or bottom three for February. It returned -1.22% for February and -3.97% for the year ending February 29. The fund had a beta of 0.39, alpha of -4.64%, and a one-year Sharpe ratio of -0.61. Finally, the Discretionary Managed Futures Strategy Fund was February’s third-worst performer in the category, returning -0.88% for the month. The fund’s one-year return of -1.90% ranked in the bottom 46% of funds in its category, and its beta of 0.03 ranked among the lowest in the category. The fund’s one-year alpha was -2.09%, indicating that it underperformed the index even as it remained mostly uncorrelated with it. In risk-adjusted terms, FUTEX’s returns resulted in a one-year Sharpe ratio of -1.09. Note : Alpha and Beta statistics are relative to the Credit Suisse Managed Futures Liquid Index. Past performance does not necessarily predict future results. The Jason Seagraves contributed to this article.

How To Look At Negative Yields Inside A Portfolio

Negative yields on bonds are no longer unicorns. In Switzerland, Germany, Denmark and several other European countries, government bonds are trading at negative nominal yields. Recently, the Bank of Japan announced it is adopting negative interest rates. For investing, there are four potential reasons that can illustrate trade-offs between different investment strategies as a result of negative interest rates. First and foremost, negative yields could simply be a consequence of active monetary policy (with the expressed goal of stimulating economic activity) in a world where bond supply and demand is not balanced. Central banks in major developed economies have amassed close to $12 trillion in government bonds since 2004, and still remain a source of demand of close to $3 trillion a year. Meanwhile, the net issuance of government bonds of about $2.5 trillion has been on the decline since 2013. This demand mismatch is likely one of the reasons there are $6.3 trillion in government bonds outstanding trading at a negative yield. This represents about 10 percent of total outstanding government debt worldwide, estimated by McKinsey to $58 trillion. Second, negative yields could potentially be correctly forecasting a sharp economic slowdown, which, as a consequence, could lead to an increase in defaults (both corporate and sovereign) in the future. Paying up now and receiving less nominal money in the future can be profitable if the price of goods has fallen sufficiently. Third, negative yields could also be a consequence of the ecology of current market participants. Choosing to not own these government bonds as an active allocation decision can (even with good cause due to their negative yields) carry risk for certain investors – e.g., the potential for higher tracking error to their benchmark or underperformance versus their peers. That said, as government bonds have an increased representation in many bond indexes that are used as benchmarks, holding these bonds to stay close to the benchmark also carries a cost: lower absolute returns due to a portfolio with an increasing component of negative return. Fourth, certain investors who have a preferred investment horizon may require a meaningful risk premium to buy bonds with maturities outside their preferred habitat. For instance, when investors with a shorter horizon are faced with short-term yields in negative territory, the steep slope of the yield curve and longer-maturity bonds might provide the inducement to buy longer bonds. Because they join other investors who invest regularly in longer maturities as part of their own preferred habitat, the ensuing higher demand could be a reason for negative yields on longer-maturity bonds, as was recently the case in Switzerland and Japan. And lastly, negative interest rates cause currency volatility and capital flight. By adopting a negative rate to weaken the currency, the true goal is to apply a haircut to government debt that is unsustainable as GDP growth stays anemic. The result is negative interest rates lead to one currency appreciating to super strength, namely the US dollar, while the rest of the world’s currencies depreciating by central banks printing money. The result of negative rates is the opposite from what it was intended; instead of a stimulus, it has led to deleveraging debt. The effect was first through the energy sector by causing distress in high yield markets that has now spread more broadly. ​ Portfolio Strategy If one believes negative yields are primarily due to demand from passive or indexed investors, then an active investment strategy should tolerate the tracking error and take the other side of the indexing herd. Despite the profit uncertainty of investing in negative yielding bonds, there is a logical approach to constructing robust portfolios. First, control exposure to risk factors where the uncertainty of outcomes may be the most severe, for instance, by adjusting overall portfolio duration. Second, tilt portfolios in directions where relative asset valuation is more attractive, e.g. equity and bonds of companies with solid fundamentals. Third, look for sources of diversification, where the ultimate and eventual resolution of the negative yield conundrum is likely to create large trends and market movements. And finally, in very broad terms, aggressive central bank intervention with negative interest rates continues to underwrite risk taking. At the same, negative rates also cause volatility, currency depreciation and deleveraging of debt. So as more central banks jump on the bandwagon to drive rates more negative, an appropriate asset allocation of conservative, higher quality credit risk, floating rate exposure, and maintaining high liquidity remains prudent. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Best And Worst Q1’16: Mid Cap Value ETFs, Mutual Funds And Key Holdings

The Mid Cap Value style ranks tenth out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Mid Cap Value style ranked seventh. It gets our Dangerous rating, which is based on aggregation of ratings of 9 ETFs and 124 mutual funds in the Mid Cap Value style. See a recap of our Q4’15 Style Ratings here. Figure 1 ranks from best to worst all nine Mid-Cap Value ETFs and Figure 2 shows the five best and worst-rated mid-cap value mutual funds. Not all Mid Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 36 to 1761). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Nuance Mid Cap Value Fund (MUTF: NMVLX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The Vident Core US Equity Fund (NASDAQ: VUSE ) is the top-rated Mid Cap Value ETF and the BMO Mid-Cap Value Fund (MUTF: BMVGX ) is the top-rated Mid Cap Value mutual fund. VUSE earns a Very Attractive rating and BMVGX earns an Attractive rating. The PowerShares Russell Midcap Pure Value Portfolio (NYSEARCA: PXMV ) is the worst-rated Mid Cap Value ETF and the Nuveen Mid Cap Value Fund (MUTF: FASEX ) is the worst-rated Mid Cap Value mutual fund. PXMV earns a Dangerous rating and FASEX earns a Very Dangerous rating. East West Bancorp (NASDAQ: EWBC ) is one of our favorite stocks held by BMVGX and earns an Attractive rating. Over the past decade, East West Bancorp has grown after-tax profit ( NOPAT ) by 14% compounded annually. Since 2008, the company has improved its return on invested capital ( ROIC ) from 2% to 14% for the last twelve months. Best of all, the recent share price decline has provided a great buying opportunity. At its current price of $31/share, East West Bancorp has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects East West Bancorp’s NOPAT to permanently decline by 10% from current levels. If EWBC can grow NOPAT by just 7% compounded annually for the next decade , the stock is worth $39/share today – a 26% upside. American Campus Communities (NYSE: ACC ) is one of our least favorite stocks held by TCVAX and earns a Dangerous rating. Despite positive GAAP net income, which doesn’t fully account for changes to the balance sheet, American Campus Communities has generated negative economic earnings in each year since 2005. Over that same time frame, the company’s already low ROIC of 5% in 2005 has fallen to a bottom quintile 4% over the last twelve months. Despite the fundamental issues above, ACC is significantly overvalued. To justify its current stock price of $43/share, ACC must stop destroying shareholder value and grow NOPAT by 12% compounded annually for the next decade . This expectation seems awfully optimistic given ACC’s track record. Figures 3 and 4 show the rating landscape of all Mid Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.