The second quarter of 2010 saw "Risk Off" overtake "Risk On". Risk came off as investors fears increased regarding the significant fiscal deficit problems facing most developed countries, the oppressive government "boot on the neck" of corporate America, and the environmental disaster in the Gulf of Mexico. As the table below shows; this manifested itself in a rather steep selloff in equities and commodities, and a continued flight to safety (namely Gold and US Treasuries). Continued high unemployment, increasing taxes, and some signs of Government austerity (outside of the US), has increased the odds of a double dip recession (or at the least a minimal growth recovery).
Gold is up 13.37% through June while International Equities (EAFE) were down -14.31%, a whopping divergence of nearly 28% in only six months! But I think the biggest shocker of 2010 is the 11.62% return on 10 - 20 year US Treasuries. The ten year treasury yields less than 3% and the two year is about 0.60%. Investors are so fearful that they are willing to accept minuscule returns on their investments for the safety of repayment. But just because ten year treasuries yield 2.95% doesn't mean you can't still make money in them. It all depends on where interest rates are in the future. If rates fall to 1.95% over the next year your return would be 10.75%, but if they went up to 3.95% your return would be -4.50%. These are not forecasts, just an example of what is possible.
Our goal at Rockhaven is to preserve and increase purchasing power over time. We do not try and forecast the unknowable future. Instead we try and stay "In Harmony with the Markets." So far this year that has meant taking a more defensive position. As can be seen from our returns we've been rather successful for a diversified investment manager. Our client composite performance (net of fees) was -3.42%, and our volatility (as measured by standard deviation) was only 2.32% (the lower the number the better).
As we head into the third quarter we have about 31.5% in cash equivalents, and that number appears likely to increase as our equity market indicators continue their bearish trends. Of course the future is always changing and our plan is to change right along with it ... to be "In Harmony with the Markets."
Performance Comparison 2010 | |||||||||
Benchmarks Ranked Year-to-Date | Ticker | Jan | Feb | March | April | May | June | Year-to-Date June 2010 | Standard Deviation Monthly Returns |
Gold ETF | GLD | -1.26% | 3.27% | -0.44% | 5.88% | 3.05% | 2.35% | 13.37% | 2.62% |
Treasury Bonds 10-20 yr | TLH | 2.82% | 0.11% | -1.13% | 2.29% | 3.25% | 3.85% | 11.62% | 1.95% |
Real Estate REIT US | VNQ | -5.52% | 5.58% | 10.20% | 7.15% | -5.33% | -5.16% | 5.75% | 7.26% |
Rockhaven GTAA Client Composite (net of fees & expenses) | -3.42% | 2.02% | 3.28% | 1.09% | -5.42% | -0.72% | -3.40% | 2.32% | |
Rockhaven GTAA Model | -3.56% | 2.13% | 3.19% | 1.51% | -5.40% | -1.05% | -3.43% | 2.32% | |
International Treasuries | IGOV | -1.03% | -0.02% | -1.22% | -1.36% | -3.29% | 0.78% | -6.03% | 1.38% |
S&P 500 Index SPDRS | SPY | -3.63% | 3.12% | 6.00% | 1.55% | -7.95% | -5.41% | -6.86% | 5.42% |
Commodities CRB Index | CRY | -6.27% | 3.46% | -0.52% | 1.60% | -8.25% | 1.46% | -8.76% | 4.74% |
Real Estate REIT Int’l. | IFGL | -6.05% | 2.43% | 4.55% | -1.24% | -9.70% | -0.28% | -10.53% | 5.32% |
International Stocks EAFE | EFA | -5.07% | 0.27% | 6.39% | -2.80% | -11.19% | -1.98% | -14.31% | 5.82% |
Is Stock Picking Dead?
Another amazing thing happened in June. Something that didn't happen in October 1987, during the internet bubble in the late '90's, after 9/11, or during the Fall of 2008. Yes, in June 2010 stocks were at their second highest correlation since 1950, and May and June were the two highest back-to-back months of correlation ever (this means that more and more stocks are moving in tandem up & down)! The reason this matters to all stock pickers, both fundamental and quantitative, is because if all stocks are moving in tandem stock picking doesn't matter. The markets today are dominated by algorithmic trading (70% - 80% of daily volume), and these traders tend to move in a herd, buying and selling baskets of stocks. This is a very different market than anything we've ever experienced, I'm not saying its good or bad, just different. This is one of the big reasons that I believe Global Tactical Asset Allocation is much more important than stock picking. GTAA is the cheapest, most efficient method of keeping a portfolio in synch with the markets, while allowing us to move quickly into or out of positions.
Special thanks to Barclays Quantitative team for bringing this to my attention.
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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