To download the Auspice May 2024 Blog as a PDF, click here.
Recently we have witnessed a significant uptick in performance chasing as select commodity markets rallied. In our 18-year experience working with investors, we have seen this before, particularly with headline commodity markets. This is not our first rodeo.
Indeed, it is a natural and expected outcome given the volatility and corresponding opportunity in commodities. For example, consider when Sugar and Coffee rose to multi-decade highs in 2023, investor interest was rather small versus similar rallies recently in Copper, or previously in Oil - both of which captured investor interest and significant inflows. With a large variety of direct and indirect product linked to these markets – it is these headline commodities markets we tend to see the most return chasing and thus, concentrated risk to investors.
Consider some of the topical, transient themes experienced this decade:
2020, Gold – During the outbreak of COVID, Gold initially was one of few commodity markets to do well and investors rushed to buy gold ETFs and gold mining stocks. Gold then proved to be one of the worst performing markets, consolidating and trading down for over three years, while most other commodities rallied.
2021, ESG – As the world rebounded and united around “building back better”, anything broadly within a ESG theme did well. In commodities, Lithium, Copper, and related stocks were investor darlings. Copper then traded down for two years until recently. Lithium has continued to trade down, with the Lithium “LIT” ETF having dropped over 50%.
2022, Petroleum Energy – Not long after the world had shunned petroleum energies and related stocks, structural energy shortages alongside increasingly profitable energy companies and a war led to a complete reversal in investor preferences. Many investors abandoned underperforming solar and EV ETFs in lieu of petroleum exposure and resource equities. The once popular “TAN” solar ETF, and newer “KARS” electric vehicles ETF, both remain down approximately 60% from highs.
2023, Uranium – Having traded sideways for many years, Uranium and related stocks finally delivered strong performance, capturing investor sentiment and flows.
2024, Metals – Following three years of consolidation, copper has finally recaptured headlines and investor sentiment; speculation seemingly at high levels with significant upside volatility followed by the worst two-day decline in 13 years[1]. Gold has made all-time highs while silver too has been strong, albeit related mining stocks - with hedging, financial engineering, and company risk - have failed to keep up. The popular GDX ETF is down 40% from 2012 highs, and the GDXJ junior mining ETF down over 70% since 2011.
If there is one takeaway from this blog, this is it: there is a lot of opportunity in commodities, however discipline and risk management is crucial. Performance chasing often leads to suboptimal outcomes by investors.
At Auspice, over short periods, we may not always keep up with benchmarks. Indeed, at 9-12% volatility, our strategies typically run at less than 50% of the risk of benchmark options. In 2021 for example when the energy concentrated GSCI TR benchmark commodity index advanced +40.3%, our flagship Auspice Diversified was up +9.6%. On the other hand, when the same GSCI TR commodity benchmark sold off -29.4% in March 2020, Auspice Diversified was also up, +9.7%.
We are strong advocates for commodity exposure, but not passive benchmark and/or concentrated sector exposure. We are all human, and investors can be prone to chase high levels of return on the upside without adequate consideration for the high levels of risk. Multi-year consolidations and violent corrections are not uncommon in commodities. For this, we employ a rules-based and active approach. Following trends up and down is one thing, having a track record in capturing trends is another.
For a long-term perspective, consider three options for commodity exposure in Chart 1 below:
Tactical, rules-based long/short CTAs such as Auspice Diversified, as represented by the BTOP50 CTA Index (live, net of fee performance of Auspice Diversified’s benchmark).
Direct, long only benchmark commodity exposure, as represented by the Bloomberg Commodity Index “BCOM TR” and the Goldman Sachs Commodity Index “GSCI TR”.
Indirect commodity exposure, as represented by energy and mining tilted TSX60.
Chart 1 - Growth of $1000; Tactical, long-only, & indirect commodity performance since 1987
Source: Auspice Capital and Bloomberg. You cannot invest directly in an index.
Table 1 below demonstrates the significant outperformance on an absolute and risk-adjusted (both Sortino and Sharpe) historical basis. The tactical BTOP50 CTA index has outperformed the BCOM TR and GSCI TR Commodity indexes by a wide margin with significantly lower volatility and less than ¼ of the maximum peak to trough drawdown. This CTA benchmark has also outperformed the TSX60 with significantly lower risk.
Table 1 – Tactical, long-only, and indirect commodity performance metrics since 1987
Source: Auspice Capital and Bloomberg. You cannot invest directly in an index.
Also note in Table 1 above that the “Skew” metric is only positive for the CTA benchmark. Positive skew means that the volatility is on the upside, when gains are made, not on the downside, when returns are negative.
Last, in Table 2 below note that BTOP50 CTA benchmark is much more accretive and diversifying to portfolios versus commodity benchmarks with just a 0.01 correlation to the TSX (0.38 and 0.35 correlation for the BCOM and GSCI broad commodity benchmarks).
Table 2 – Tactical, long-only, and indirect commodity correlation since 1987
Source: Auspice Capital and Bloomberg. You cannot invest directly in an index.
In sum, while it may be enticing to chase higher risk profiles, we strongly believe caution is warranted. The Team at Auspice is very constructive on the commodity outlook long term; we firmly believe we are in the early innings of a commodity supercycle. But even in the strongest of commodity bull markets there can (and will) be pullbacks and corrections. Markets and sectors can also go sideways for years. Timing these opportunities is incredibly difficult, and concentrated bets typically only look good in the rear mirror.
We don’t profess to have a crystal ball, but we do have a disciplined approach that has led to significant long-term outperformance versus commodity benchmarks. If you don’t have a 5-10% allocation to tactical commodity or CTAs strategies, contact us today at info@auspicecapital.com.
DEFINITIONS
· The S&P Goldman Sachs Commodity Total 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 S&P GSCI Total Return index measures a fully collateralized commodity futures investment that is rolled forward from the fifth to the ninth business day of each month.
· 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 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 S&P/ TSX 60 Index is designed to represent leading companies in leading industries. Its 60 stocks make it ideal for coverage of companies with lar ge market capitalizations and a cost efficient way to achieve Canadian equity exposure. Price Return data is used (not including dividends).
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.
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
[1] https://www.linkedin.com/feed/update/urn:li:activity:7199491895754985472/