Following 3 years of strong returns for CTAs, 2023 was a challenging environment for both passive commodity and active CTA/Managed Futures strategies. Indeed, while far from the -19.5% S&P500 and -13.1% Bloomberg Agg Bond Index corrections in 2022, all four commodity / CTA benchmark indices finished slightly lower in 2023. See Table 1 below.
Table 1: Annual Performance, 2020-2023.
Source: Auspice Capital and Bloomberg as at December 31st, 2023. You cannot invest directly in an index.
Commodity cycles historically experience ebbs and flows. Previous periods of commodity supply shortages and strong price appreciation have had similar consolidations within longer term cycles. The 1970s bull market experienced a 3-year correction, the 1980s bull market experienced a 2-year correction, and the early 2000s bull market experienced two 12 plus month corrections. See Chart 1 below. Timing these cycles is difficult. Within a long-term cycle there can be gyrations, such as those experienced recently on the downside with COVID, and on the upside with Russia/Ukraine. This is why we employ a rules-based, agnostic approach at Auspice.
Chart 1: Goldman Sachs Commodity Index (GSCI TR) Bull Market Returns.
Source: Auspice Capital and Bloomberg as at December 31st, 2023. You cannot invest directly in an index.
For CTAs, prior to the Quantitative Easing period when inflation, volatility, and rates were compressed, performance was more consistent vs commodities, albeit not without corrections or down years. The 2020-2023 period is not dissimilar. See Chart 2 and Table 3 below.
Chart 2: Performance since BTOP50 CTA 1987 Inception.
Source: Auspice Capital and Bloomberg as at December 31st, 2023. You cannot invest directly in an index.
Table 3: Performance Since BTOP50 CTA 1987 Inception.
Source: Auspice Capital and Bloomberg as at December 31st, 2023. You cannot invest directly in an index.
2024 and Beyond
In their 2024 outlook, Goldman Sachs believes commodities will be the strongest performing asset class. See Snapshot 1 below. This is not unlike their 2020 bullish call received in late 2019[1] – they were right.
"We recommend going long commodities in 2024, as we expect somewhat higher spot commodity prices, strong carry, and see hedging value against geopolitical supply disruptions. We forecast a 21% GSCI 12M total return.”[2]
Snapshot 1: Goldman Sachs 2024 Asset Class Outlook.
Source: https://www.goldmansachs.com/intelligence/pages/gs-research/global-markets-outlook-2024-towards-a-better-balance/report.pdf
TD, a new participant in offering public product but long a commodity player, also recently came out with a consistent bullish 2024 commodity outlook in December. We agree with the sentiment. See Snapshot 2 below.
Snapshot 2: TD Wealth, The Year Ahead: 2024.
Source: https://digital.tdwealthmedia.com/wp-content/uploads/2023/12/The-Year-Ahead_2024.pdf
At Auspice we believe that we have entered a new regime of structurally higher inflation. If you did not see the Auspice featured Dec 31st 2023 Special to the Financial Post “How the '3 Ds' are Leading to a Structural Shift in Inflation”, see it here. Deglobalization, decarbonization, and demographics are likely to put a floor on inflation that we believe will be closer to the long-term 4% average since 1970.
We are not calling for a return to 1970s inflation. Risks however predominantly remain to the upside in our opinion. Global commodity supply remains tight[3]. India is set to become a new global leader in commodity consumption[4].
While we have recently experienced a tame period despite two global conflicts and an emerging one in China/Taiwan, further global dislocations in commodities may cause inflation to follow a similar path to the 1970s. As Picton Mahoney noted in their 2024 outlook, the structural inflation pressures are similar to those in the 1970s, and the similarities in the CPI trend should be noted. See Snapshot 3 below.
Snapshot 3: CPI in the 1970s Versus Today.
Source: Picton Mahoney Q4 2023 Investment Review &Outlook
Going forward we think the biggest risk for many investors is not having an adequately diversified portfolio that can deliver in a variety of scenarios. In 2023 commodities and CTAs underperformed while equities outperformed[5]. In 2022 the opposite occurred[6].
If indeed inflation remains at more normal levels, diversification may increasingly be important. If you don’t have a 5-10% commodity or CTA allocation, reach out to us today at info@auspicecapital.com
DEFINITIONS
· The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).
· The Barclay BTOP50 CTA Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50. The index does not encompass the whole universe of CTAs. The CTAs that comprise the index have submitted their information voluntarily and the performance has not been verified by the index publisher.
· The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,509 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
· The S&P Goldman Sachs Commodity Excess Return Index (“GSCI TR”) is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.
· The Bloomberg Commodity Index Excess Return (BCOM TR) Index is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities on the commodity markets. No one commodity can compose more than 15% of the BCOM ER index, no one commodity and its derived commodities can compose more than 25% of the index, and no sector can represent more than 33% of the index.
· The SG CTA Index provides the market with a reliable daily performance benchmark of major commodity trading advisors (CTAs). The SG CTA Index calculates the daily rate of return for a pool of CTAs selected from the larger managers that are open to new investment. Total return data is used.
· The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.
IMPORTANT DISCLAIMERS AND NOTES
Some of the assumptions and opinions contained herein are the view or opinion of the firm and are based on management's analysis of the portfolio performance.
Prior to February 28, 2023, Auspice Diversified Trust was offered via offering memorandum only and this Fund was not a reporting issuer during such prior period. The expenses of the Fund would have been higher during such prior period had the Fund been subject to the additional regulatory requirements applicable to a reporting issuer. Auspice obtained exemptive relief on behalf of the Fund to permit the disclosure of the prior performance data for the Fund for the time period prior to it becoming a reporting issuer.
Commissions, trailing commissions, management fees and expenses may all be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
The contents on this website are provided for informational and educational purposes and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting and tax. Please consult with your own professional advisor on your particular circumstances.
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise. Please read the offering documents before investing.
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[1] https://www.nasdaq.com/articles/goldman-sachs-recommends-going-long-on-commodity-index-oil-in-2020-2019-11-25
[2] https://www.goldmansachs.com/intelligence/pages/gs-research/global-markets-outlook-2024-towards-a-better-balance/report.pdf
[3] https://www.home.saxo/content/articles/commodities/commodity-weekly---1-dec-2023-01122023
[4] https://www.auspicecapital.com/alt-invest/2023/1/4/india-the-emerging-demand-shock-to-further-fuel-the-commodity-supercycle
[5] The BTOP50 CTA Benchmark Index was -2.0% in 2023 and the GSCI TR -4.3% vs the S&P500 which was +24.2%.
[6] In 2022 the BTOP50 CTA Benchmark Index was +14.9% and the GSCI TR +26.0% vs the S&P500 which was -19.5%%.