A reader passed along a link to a Hard Assets Investor interview with Mebane Faber that was mostly about his new book The Ivy Portfolio. I have a copy of the book but need to apologize for not having had time to read and review it.
There is one point in the interview that I wanted to explore and perhaps we can elicit a response from Mebane.
In response to a question about how to access the commodity space Mebane says "...and in commodities and currencies, we think long/short makes more sense than long/flat." He goes on to say "To access the space, we use the managed futures ETN [the ELEMENTS S&P CTI ETN (NYSE Arca: LSC)); Claymore is now putting out an ETF on the same index. We really like the managed futures product."
He says that in the book he talks about broad commodity index for commodities. In the chart I have LSC compared to the iPath Commodity ETN (DJP) and PowerShares Commodity ETF (DBC) for the life of LSC. I don't think anyone could have too much of a gripe about the performance of the fund but it does not look like a proxy for commodities to me.
If you look at a chart for Rydex Managed Futured (RYMFX), which is similar to LSC and has been around about 15 months longer, compared to DJP and DBC you will see that it too does not really look like a commodity proxy. I believe in what LSC does (I own RYMFX personally and for clients) but I would not expect a long short vehicle to fully capture the reflation trade or any other commodity effect. In fact since the March low, DBC is up 6%, DJP is up 8% and LSC is down 10%.
Mebane makes another point that I agree with about replicating hedge funds and private equity. He says that thus far the ETPs out there are imperfect although I would note that the Index IQ Hedge Fund ETF (QAI) is too new to render a verdict yet. And as I mentioned the other day Index IQ filed for a bunch of other hedge fund replication funds. If some of them deliver as hoped for then that would be an evolutionary step toward recreating the endowment portfolio for those so inclined.
9 comments:
Hmm. A chart comparing LSC and RYMFX isn't perfect, but they are closer than the chart above. LSC seems to have bigger swings.
In a way, doesn't managed futures make more sense for that 20% than commodities? If Faber's idea is meant to be a total portfolio, he only has 20% in bonds. A managed futures fund can be kinda bond like (I guess) so those 2 pieces together would give you 40% in "bonds" or non-equities, if you prefer to put it that way.
If you accept my thesis that managed futures is not commodities then it is not commodities it is something else. Further I don't want anywhere close to 20% in a narrow based diversifier.
Do you think managed futures is bond like? Do you think commodities are bond like? If the answer to those questions are different then one is not a proxy for the other.
For fun I ran some numbers using:
VTI (total market)
EFA
IYR (real estate)
IEF (7-10 year treasury)
RYMFX
2008: -18.28
20091Q: -12.47
As you can imagine, IEF really helped in 2008 (not to mention RYMFX).
Mish proclaims the deflation trade is back on:
http://globaleconomicanalysis.blogspot.com/2009/04/deflation-trade-is-back-on.html
The difference is that RYMFX is 50% "financials" which includes g-7 currencies and t-bills. LSC is only commodities. Based on the S&P Diversified Trends Indicator and S&P Commodity Trends Indicator, respectively.
If I understand what Faber's system does, and these funds, then I might venture to guess that LSC could capture the commodity exposure in his system - if you *always* stay in LSC, then the fund automatically follows the trend for you. Maybe it would offer the same return as using the 10-month to move in and out of DJP or DBC, and without trading commissions - does this make sense? I highly suspect that he has it all worked out...
Well personally I'm 26 so I don't allocate to bonds at all, and I work in real estate so I don't allocate to REITs. My target is 5% to LSC and RYMFX each and 15% to DJP. This allocation does give some exposure to t-bills as they're the collateral used in these funds and in the financial portion of RYMFX. Roger, am I missing something here?
I like the Jim Rogers argument, and basically have a strong stomach for volatility, so that's where I wind up.
Any comments appreciated...
Today represented a pretty sharp reversal from an ideal price level (SP 870) and timing window. Pretty ugly shape to the decline. It’s oversold extremely short term, but I’d say any good 50%-61.8% bounce from the Fri’s highs should be sold (SP850-860 level). Any kind of bounce next few days may be the last chance to get out or get short at good level.
Changing topic---
Roger, here's some macro re your Norwegian fishing idea:
http://news.bbc.co.uk/2/hi/science/nature/8008939.stm
I still like my Chinese fish farm, HQS.
Roger, it seems to me that there isn't enough history to judge whether LSC has similar returns to a commodity index with less volatility as stated. Wouldn't it require many, many years to make that statement or refute it?
If you review the back test for the S&P CTI, the evidence would show that the claim has validity. How you get to 150% up over 15 years may be WAY different but isn't that what the product is supposed to do? Don't we want zig versus zag? I hold a little RYMFX, LSC, DBV and GCC for commodity exposure and currency exposure. I want them doing different things at any given short term period but in the end, I'm still hoping each produces 8% or so.
DE
Ok so it has been a around a short time and in that short time it looks nothing like commodities. Based on what is known now it would seem easier to conclude not a proxy.
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