Letter to Investors: May, 2012 Model Portfolio Results
For the 4 week period from May 4, 2012 to June 1, 2012, the SP500 posted a (-6.72%) loss. This was on top of the (-2.76%) loss in the prior reporting period. Over the past 9 weeks, the SP500 has loss (-9.48%). For the year through June 1, 2012, the SP500 is up 1.63%. From January 1, 2011, the SP500 has gained 1.62%.
That is 17 months of nothing! Investors have gotten little for their risk taking efforts other than the excitement of seeing their portfolios go up and down like a roller coaster. With the cost of money at zero, I guess returns are expected to head in that direction as well. Federal Reserve Chairman Bernanke’s grand experiment isn’t doing what it is suppose to do. It hasn’t lifted the economy or fixed the unemployment problem in this country. It does create a speculative environment in risky assets, but this effect doesn’t seem to have any lasting benefit. But then again, why should it. In essence, there is no free lunch. We can’t devalue our way to prosperity, but lord knows, our economic stewards will try. What else can they do?
Fortunately, our models have produced some timely market calls. In our Broad Market and Aggressive Model Portfolios, we have been out of equities for 6 weeks. We have been in Treasury bonds and utilities for 9 weeks. We remain long gold, which was down about 2% last month, and this asset appears set to move higher in a significant way. The biggest loser and the biggest drag on the Aggressive Model Portfolio was our position in crude oil. We have “enjoyed” a 20% drop in this asset over the past 5 weeks alone.
But this is the beauty of having balanced portfolios. Despite the losses in crude oil, we weren’t hurt too bad in the Aggressive Model Portfolio. Our losses in this portfolio were still less (by 100 basis points) than the SP500′s losses for the month. The asset models and how those models function within a portfolio have done what they are suppose to do — kept us out of harms way during market downturns.
What should we expect going forward? In equities, be patient and wait for our pitch. I said this last month and probably the month before that. I tend to be a buyer when investors are bearish and have thrown in the towel. Despite the losses over the past month, I still don’t believe we are at that buy point yet, but lower prices will bring the bears out. We will get to that point; we always do. In Treasury bonds, there is safety, and for now, that is a good thing. But I think there is more to the Treasury story than capital looking for a safe haven. I think investors are front running the actions of the Federal Reserve. As the market drops, calls for the Fed to act get louder. Their tool – albeit a blunt one – is bond purchases, and the current strength in bonds is just a manifestation of that. In 2011, Treasuries performed strongly from March to August, when the Operation Twist (i.e., more bond purchases) was announced. Once the news was known, Treasury prices languished as risk assets took off. Gold continues to remain attractive from both a fundamental and technical standpoint, and for the same reasons mentioned for Treasury bonds. Gold is telegraphing the actions (or is it stupidity?) of the Federal Reserve. Forget this safe haven nonsense, and forget about the direction of the Dollar. It has little bearing on the price of gold. In fact, the best times to buy gold over the past 10 years has been when the Dollar Index has been rising. Incidentally, I am expecting the Dollar Index to rise. Commodities have been crushed and should enjoy a bounce. In the absence of the “risk on” trade (which would be fueled by Central Bank intervention), the fundamentals for commodities remain poor.
For the record, please take a moment to review last month’s comments. I am proud to say that they were timely and insightful.
- ARL Advisers has 3 portfolios: Conservative, Broad Market, and Aggressive
- Use of proprietary models and a research driven methodology to determine those factors that lead to sustainable market moves
- Diversification across equities, bonds, real assets, and currency
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ARL Advisers: Strategic. Balanced. Targeted.
For the 4 week period from May 4, 2012 to June 1, 2012, the Conservative Portfolio loss (-2.25%). Over the same time period, the SP500 loss (-6.72%). For 2012, the Conservative Portfolio has gained 1.69% and the SP500 has gained 1.63%. The portfolio has positions in GLD, SPY (remember neutral rating), XLU and BND. As an aside, I am looking to add a currency pair to this portfolio.
Since its inception on January 1, 2011, the Conservative Portfolio has returned 9.66%. Buy and hold S&P500 has returned 1.62%. Results are through June 1, 2012. The Conservative Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Conservative Portfolio v. Buy and Hold SP500/ since inception
The goal of the Conservative Portfolio is to generate a return equivalent to the long term returns (8.78%) annualized total return since 1871 of the SP500. Capital preservation is a hallmark of this strategy.
For the 4 week period from May 4, 2012 to June 1, 2012, the Broad Market Portfolio gained 0.08%. Over the same time period, the SP500 loss (-6.72%). For 2012, the Broad Market Portfolio has gained 8.44% and the SP500 has gained 1.63%. Results are through June 1, 2012. We start the month with positions in the following sectors: XLU and BND. This portfolio also has about a 40% cash position.
Since its inception on January 1, 2011, the Broad Market Portfolio has returned 2.10%. Buy and hold S&P500 has returned 1.62%. The Broad Market Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Broad Market Portfolio v. Buy and Hold SP500/ since inception
The goal of the Broad Market Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 with significantly less risk than buy and hold S&P500.
For the 4 week period from May 4, 2012 to June 1, 2012, the Aggressive Portfolio loss (-5.54%). Over the same time period, the SP500 loss (-6.72%). For 2012, the Aggressive Portfolio has loss (-3.55%) and the SP500 has gained 1.62%. Results are through June 1, 2012. As we start this reporting period, portfolio positions include: GLD, OIL, BND, and XLU.
Since its inception on January 1, 2011, the Aggressive Portfolio has returned 8.45%. Buy and hold S&P500 has returned 1.62%. Results are through June 1, 2012. The Aggressive Portfolio equity curve v. buy and hold SP500 (since inception) is shown in the next figure.
Aggressive Portfolio v. Buy and Hold SP500/ since inception
The goal of the Aggressive Portfolio is to generate a return that exceeds the long term returns (8.78% annualized total return since 1871) of the SP500 by 2-3 times.
Historical returns and portfolio examples shown on this website are not presented net of investment advisory fees or other transaction costs. Actual performance results will vary from these examples. Past performance is not indicative of future results. This material should not be considered a recommendation to purchase or sell any particular security or an offer to sell any product. ARL Advisers, LLC reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
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