To download the Auspice October 2024 Blog as a PDF, click here.
"Inexperienced or impatient investors all too often redeem at the bottom of a manager's drawdown, only to witness the surge in performance thereafter."[1]
We originally wrote “On Sale” in 2017. And at that time, we and other CTAs were indeed, on sale. Do you remember? Probably not. Was it a great opportunity? Arguably, yes. We were further inspired by the seminal paper by fund manager Tom Basso who wrote the paper "When to allocate to a CTA - Buy them on sale".
It was a run in the equity market that was fantastic (~20% in 2017). Life was good, rates and volatility were low. Portfolio and inflation protection needs /requirements were perceived to be low, especially for retail investors. But at that time we were seeing smart institutional investors stepping in. Hedge funds, commodities and specifically CTAs, were on sale. Here we are again.
Typically, when something is "on sale" it means that the item is offered at a reduced or discounted price for a limited period. Straight retail gospel. Everybody, no matter how well off, gets excited by sales.
For the investing world, we often hear that a stock is "on sale" or "lagging" because of some factor that has pulled down its price, that is likely temporary in nature, but the company's business or overall strategy remains solid and intact in theory. This month a Morningstar piece caught our eye: "Undervalued by 25%, this dividend stock is an attractive long-term buy".[2]
Our observation is that all types of investors, retail or institutional, seem to get excited by this too. Just like finding a sale on a consumer item, when investors find a sale on a stock, they want to buy it. The human emotion of it makes sense.
However, this seems to break down when it comes to investment funds. When an investment fund goes down in value, investors often wonder what’s wrong. What’s wrong with the manager, the strategy, the investment thesis? They question the very fiber of the investment - which is absolutely their right given they are paying for it. The question is why.
Just like any other item, there are ideal times for a fund, and times that are challenging. Every investment strategy has this challenge. If it is a long-biased stock fund, there are times that the market falls or corrects. Even “long-short” funds can be challenged as markets whip up and down without much follow through. And when you look at quantitative funds that are agnostic to price direction or asset type (ex CTAs investing in commodities in addition to stock indices, currency and bond futures), there are times that the trends and volatility are less than ideal.
The benefit of these funds is that they are based in risk management as first principal – protecting the investors capital is job one. Most are not concentrated bets on a single stock or sector of the market. The risk controls in place prevent the massive losses typical in single stock or asset investing. Most do not have pullbacks as deep as single stocks or stock benchmarks. CTAs are indeed in this camp.
For example, while the S&P's worst pullback is 53% and the BCOM Commodity Benchmark 72%, the HFRX Global Hedge Fund Index is 25% while the Barclay's BTOP50 CTA Index is merely 16%.
So, when you see an investment fund pulling back, consider this: Is the investment thesis valid? What has challenged the strategy? Is the strategy no longer valid or is this likely temporary? Does the strategy have solid risk controls in place to control pullbacks/drawdowns? What is that strategy's track record at times when we value its return most?
For many strategies broadly under the “fundamental discretionary” category, these can be tough questions to answer. For systematic managed futures and CTAs – with decades of history and disciplined, process driven strategies, one can arguably have much more confidence. With a CTA you are buying a system that has been proven, often over multiple decades, with well-defined risks and performance characteristics.
If you are comfortable in those answers, maybe the strategy is "on sale". Perhaps this is temporary and an opportunity. Rather than chasing returns - chase good strategy and disciplined risk management. Particularly with recent equity strength, you may be underweight your longer term CTA target weighting. And if you find it on sale, consider it a blessing.
We don’t make money every month, quarter or year - we make money when it counts and have never missed over 18 years. The value has been demonstrated time and time again, and today amidst a CTA correction, Auspice is essentially on sale.
If you don’t have a 5-10% allocation to tactical commodity or CTAs strategies, now may be an opportune time to rebalance out of recent equity strength and into tactical commodity strategies.
To connect with the Auspice team contact us today at info@auspicecapital.com.
IMPORTANT DISCLAIMERS AND NOTES
The returns for Auspice Diversified Trust ("ADT") are “net” (including management and performance fees, interest and expenses). Returns represent the performance for Auspice Managed Futures LP Series 1 (2% mgmt, 20% performance) including and ending November 2019. From this point, returns represent the performance for Auspice Diversified Trust Series X (1% mgmt, 15% performance) which started in July 2014.
The indicated rates of return are the historical annual compounded total returns including changes in share and/or unit value and reinvestment of all dividends and/or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.
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.
Certain statements in this document are forward- looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “target”, “seek”, “will” and similar expressions to the extent they relate to the Fund and the Manager. Forward- looking statements are not historical facts but reflect the current expectations of the Fund and the Manager regarding future results or events. Such forward-looking statements reflect the Fund’s and the Manager’s current beliefs and are based on information currently available to them. Forward-looking statements are made with assumptions and involve significant risks and uncertainties. Although the forward-looking statements contained in this document are based upon assumptions that the Fund and the Manager believe to be reasonable, neither the Fund or the Manager can assure investors that actual results will be consistent with these forward-looking statements. As a result, readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results or events to differ materially from current expectations.
The forward-looking statements contained herein were prepared for the purpose of providing prospective investors with general educational background information about the Funds and may not be appropriate for other purposes. Neither the Fund or the Manager assumes any obligation to update or revise them to reflect new events or circumstances, except as required by law.
This blog may contain hypertext links to web sites owned and controlled by other parties than Auspice. We have no control over any third-party-owned web sites or content referred to, accessed by or available on this web site and therefore we do not endorse, sponsor, recommend or otherwise accept any responsibility for such third-party web sites or content or for the availability of such web sites. In particular, we do not accept any liability arising out of any allegation that any third-party-owned content (whether published on this or any other web site) infringes the intellectual property rights of any person, or any liability arising out of any information or opinion contained on such third-party web site or content.
DEFINITIONS
• 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 Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market indices in the United States.
• The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
[1] https://www.highridgefutures.com/wp-content/uploads/2021/01/BTOP-Sheet.pdf
[2] https://www.morningstar.com/stocks/undervalued-by-25-this-dividend-stock-is-an-attractive-long-term-buy