Tag Archives: ideas

Are Alternative Mutual Funds Eating From The CTA Pie?

It seems like everywhere you look, you see a chart showing the upward AUM growth of liquid mutual funds, as well as the number of new funds. These charts left us with one main lingering question that we think is on the mind of many in the Managed Futures space. How big is the Liquid Mutual fund compared to the rest of the industry? And is that growth in addition to, or at the expense of, the rest of the industry? We explored this question in the latest article featured in CTA Intelligence , seen below. Are alt mutuals eating from the CTA pie? There’s no doubt that the packaging of managed futures into liquid mutual funds (’40 Acts’ as they’re called in the biz) has changed the managed futures space forever. It just depends which side of this particular aisle you’re on whether you view that as a good or bad change. On one hand, you can argue the $11bn AQR which has been brought into the space is good for the industry (in a sort of rising tide lifts all boats argument). On the other hand, there were the snickers and jeers in the audience at last year’s managed futures Pinnacle Awards when Cliff Asness won a lifetime achievement award. Many said he should have won the lifetime damage award for undercutting everyone on fees and essentially switching $11bn in money from 2/20 to 125bps). So which is it? Are managed futures mutual funds good for the industry as a whole? This may all seem like semantics, but it is surely important for those playing their particular brand of managed futures to investors. If mutuals are grabbing assets at the expense of others, then that’s surely not helpful to the grand majority of fund managers out there, not to mention the exchanges, brokerage firms, and the rest of the industry which need new money brought into the space to grow, not just the same money switching to mutual funds. Which brings us to the numbers. We gathered the data on the assets in managed futures mutual funds to trace the growth of the category since 2013. Then, we looked to compare that growth to the growth of managed futures as a whole from the BarclayHedge database. Now, a few details to consider: One, we made one big assumption, that all of the managed futures mutual fund AuM is included in the BarclayHedge CTA database, to make the math as simple as subtracting the ‘liquid AuM’ from the BarclayHedge AuM to arrive at the ‘non-liquid AuM’. Second, we subtracted Bridgewater’s AuM from the BarclayHedge numbers ( we don’t consider them to be managed futures ). And finally, we’re talking growth of assets here and sort of commingling that with inflows and outflows, as that term is known in the mutual fund world. Our methodology is considering the change in assets, so the growth or decline is both inflows/outflows and performance. As for what we would anticipate to see if there’s a rising tide effect, we would expect both curves to be up varying amounts. If there is ‘liquid’ growth at the expense of private funds, we would expect sort of mirror image curves, with private on the bottom and liquid on top. So what did we find – more of the mirrored look, albeit with private funds more mirrored than just mutual funds would explain – meaning they didn’t lose a dollar in assets for every one mutual funds brought in – they appear to have lost more. Going with BarclayHedge numbers, private funds lost around $40bn in assets through the middle of 2014 before pulling in around $20bn to end the period down roughly $19bn. Meanwhile, their liquid alt counterparts showed a slow but consistent growth of around $13bn over two years (amazingly, AQR was about $7.5bn of that amount according to Brightscope ). All in all, the managed futures mutual funds in the Morningstar managed futures mutual fund category outgrew private funds by $33bn. Click to enlarge This is interesting but it doesn’t completely answer the question we are after. Growth in assets are a good indicator of which vehicle investors are adding or subtracting from, but it doesn’t quite tell us how much of the industry is controlled by each type. Here’s a look at the percentage of managed futures assets controlled by mutual funds compared to the amount that is not. In 2013, our estimation of the total assets in managed futures through both private and liquid funds was about $206bn. The Morningstar category had around $9.6bn of that number, meaning 4.7% of the managed futures pie was controlled by mutual funds (cue pie chart): Click to enlarge Click to enlarge Fast forward to 2015, and we estimate managed futures overall actually went down in AuM by about $8.1bn to $198bn, while mutual funds grew by $13.9bn over the same time to a new high of $23.7bn, meaning managed futures mutual funds now represent 12% of the industry. The last two years have seen mutual funds share of the managed futures pie jump from 4.6% to 12%. That’s sort of impressive, but not as big of a jump as we might have thought before crunching the numbers. Perhaps, it’s important to apply context to what was going on during this growth. Managed futures was experiencing its worst drawdown in a generation throughout 2013 and the first half of 2014, then following it up by posting its best performance since 2008 in the second half of 2014.Grabbing a bigger slice of the pie with what’s generally considered ‘hotter’ money investing in mutual funds is certainly a feat. There’s no denying mutual funds are making up more of the managed futures space, but private funds still control There’s no denying mutual funds are making up more of the managed futures space, but private funds still control nine tenths of AuM – that’s a big number. The question is, what does the future trajectory look like? You would think mutual funds would continue making hay and taking a bigger and bigger slice of the pie, and indeed more and more managers we talk to are asking when, not if, they should consider switching to a mutual fund format. But then there are reports that institutional investors are looking to increase their exposure to private funds in 2016. And last but not least, it’s not a wide open road ahead for liquid alts products with new SEC derivatives rules on the horizon , potentially meaning you would need millions of dollars to trade a single Euro Dollar future, effectively putting the managed futures mutual fund complex out of business. Stay tuned…this is one battle definitely worth watching

Shifts In Leadership: Rules 3 And 4 For Investing

The stock market has moved towards new highs on the backs of the new leaders—the economically sensitive stocks. It’s not that the global economy has improved that much but it is that these companies have retooled to do better in a weaker environment. Expectations have been brought so far down and the stocks got so cheap that it has been easy to beat expectations with first quarter results. The market likes it when companies exceed expectations. Commodity prices, the bell weather for cyclicals, are increasing too, benefiting from a weaker dollar, which has now hit a multi-month low for reasons discussed in prior blogs and a somewhat stronger China. There has clearly been a mindset shift away from the old leaders towards the new and unless you recognize this shift, your performance will continue to lag behind the averages. Fortunately for our investors, we made these changes months ago beginning with covering our energy shorts, increasing our exposure to economically sensitive (especially commodity) stocks that are financially strong. We also are over-weighted banks and financials as discussed previously as a win/win proposition regardless of the economy. The best part about this change in leadership is that future earnings comparisons get easier for them as the year progresses as their results turned down dramatically beginning with the second quarter of 2015. Secondly, a weaker than expected dollar for 2016 has caused management to lift forecasts for this year. We made the shift in investment emphasis months ago aided in good part by utilizing our Rules #3 and #4 for investing. After looking at managements and strategies, we look for companies with rising incremental rates of returns and margins. In addition we are always searching for companies nearing their inflection point for earnings. Companies increasing their returns and margins are potential long investments as it tends to boost valuation and stock prices over time and it’s the reverse for the shorts. In addition, companies nearing an inflection point in earnings from negative to positive or visa versa as additional tools for investing. Anticipating with accuracy the inflection point as well as changes in incremental rates of returns are two of my time-tested rules for investing. These stocks tend to rise on a wall of worry or decline on a wall of exuberance… all the way to the bank. Patience is needed to let them unfold. None of these rules work in a vacuum. A successful investor needs a systematic approach combining a global macro-view for the proper asset allocation and risk controls with a bottom-up selection of each investment, which requires first hand research and and in-depth testing. While I agree with Warren Buffett that hedge funds have unperformed as a group over the last few years. It would be unwise to paint all managers with the same brush. A handful, who really understand what it takes to be a global investor today and abide by their time-tested methodologies, have done quite well and are worth every penny that they earn. Paix et Prospérité is one of them. Let’s take a quick look at the data points from last week and see if there were any changes in our core beliefs, asset allocation, risk controls and stock selection: The United States reported first quarter GNP increasing at an annual rate at 0.5% as we predicted down from a gain of 1.4% in the fourth quarter. Consumer spending led the way with a gain of 1.9% in the quarter down from 2.4% in the prior quarter; service spending rose by a healthier 2.7%; the trade gap widened reducing GNP by 0.34%; housing rose at a 14.8% rate; nonresidential fixed investment fell 5.9% and the GDP price index increased by only 0.7%. It was important to note that disposable income accelerated to a 2.9% gain in the quarter from 2.3% in the fourth quarter and the savings rate rose to 5.2% from 5.0% in the prior quarter. Growth in employment and wages combined with low inflation will result in more consumer discretionary income, which will support continued growth in consumer spending and the economy in 2016. The Fed also met last week and there was no surprise that the Fed policy was left unchanged. It is obvious why the Fed remains on hold: the U.S. economy weakened in the most recent quarter; inflation remains well below the 2% Fed target; problems abound abroad and finally fear of the ramifications of Britain potentially leaving as a member of the Eurozone. Economic activity and employment accelerated in the Eurozone in the first quarter with a gain of 0.6% from the fourth quarter and up 1.6% from a year ago. It was important to note that consumer prices reported for April were 0.2% below the prior despite all the actions of the ECB. Expect no changes in monetary and fiscal policies until after the Brexit vote at the end of June. China’s official manufacturers index was reported yesterday at 50.1 down from 50.2 the prior month. A number above 50 signals that the economy continued to expand after seven months of contraction. New factory orders and the production sub-index both fell slightly but also remain over 50 indicating continued expansion too. I remain confident that China will expand by at least 6-6.5% this year bolstering world growth. Japan remains the trouble spot amongst all major industrialized countries. The BOJ met and maintained its policies; the yen strengthened as investors sold risk assets and the stock market fell dramatically. Etsuro Honda, an advisor to Prime Minister Abe, raised concerns that monetary policy alone cannot lift the economy however the country’s debt situation precludes much stimulus. I remain cautious on Japan. Let’s wrap up. Events of the last week reinforced many of our core beliefs. One of my key beliefs, “This is a market of stocks, not a stock market”, was bolstered this week by a combination of disparate earnings reports and commentary by companies across a wide spectrum of industries but also by the clear shift in mindset from old leadership to new. This doesn’t mean that an Amazon, Facebook, Alibaba or a LinkedIn cannot still stand out, but I am suggesting that you need to recognize the changes occurring and invest stock-specific rather than by groups, regions or industries. In closing, review the facts, and then pause to reflect on proper asset allocation, risk tools, mindset changes by investors and managements. Lastly, do in-depth research on each investment… and invest accordingly!

The V20 Portfolio: Week #30

The V20 portfolio is an actively managed portfolio that seeks to achieve an annualized return of 20% over the long term. If you are a long-term investor, then this portfolio may be for you. You can read more about how the portfolio works and the associated risks here . Always do your own research before making an investment. Read the last update here . Note: Current allocation and planned transactions are only available to premium subscribers . Bonus: Recently I was interviewed by Investor In The Family , a podcast that touches on all facets of the investment world. I talked about some of my investment philosophies and why the V20 Portfolio was able to outperform. I will dedicate another piece to elaborate on certain points, but you can listen to the podcast today right here . Over the past week, the V20 Portfolio declined by 3.7% while the SPDR S&P 500 ETF (NYSEARCA: SPY ) slipped by 1.3%. Portfolio Update Despite beating earnings on Tuesday, Spirit Airlines’ (NASDAQ: SAVE ) stock shed 11.6% over the past week. The decline reflected the general pessimism towards the airline industry, as demonstrated by AMEX Airline Index’s 2.9% drop. I believe that the biggest contributor to the loss was rising oil prices. While fuel expense was still down quarter on quarter, the rallying commodity market will inevitably increase the price of fuel should the current uptrend persist. This is a macro factor that every single airline is exposed to, but I believe that Spirit Airlines will be among the least affected. Its strong operating margin (~20%) means that increasing fuel prices will be less damaging to the firm’s bottom line. To illustrate, a 500 bps increase in fuel expense as a percentage of revenue will wipe out 25% of operating profits for Spirit Airlines, whereas the same increase will erase 50% of operating profits of a company running on a 10% operating margin (e.g. Virgin America). Despite the fact that oil was climbing to new highs, Conn’s (NASDAQ: CONN ) was not able to benefit. Given disappointing retail sales in March (-0.3% actual vs +0.1% expectation), sentiment may worsen next week. While we should not be overly concerned with these month-to-month reports, it is still worthwhile to understand how macro factors can affect investors’ perception in the short term. One company that did directly benefit (at least from a market perspective) from climbing oil prices was our helicopter transportation company. While shares have appreciated, it is very possible that the company’s oil and gas revenue will continue to deteriorate in 2016. In the long-run, rising oil prices will still benefit the company by increasing demand for air transportation. However, this does not preclude the company from suffering short-term setbacks. The market has been efficient enough to recognize that distinction, at least over the past couple of weeks. The title of being the second biggest position, which belonged to Spirit Airlines, was usurped by an insurance company when we carried out our major transformation at the beginning of April. Thus far, shares have traded sideways. No matter how well the company performs in Q1 and Q2, Investor sentiment may not reverse until hurricane season passes given the company’s exposure in Florida. In that sense, next week’s earnings release may not be as important as you think. Performance Since Inception Click to enlarge Disclosure: I am/we are long CONN, SAVE. 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.