Rule of 72 - August 2016

Want to know how long it takes to double your investments?

Look no further than the old “Rule of 72.”

While no one has a crystal ball, this metric helps to figure out the length of time required to double your money at a given rate of return, reflecting the power of compound interest. All you have to do is divide the rate you want to achieve into 72.

Recently, I heard two people talking about this – a client telling me their goals, and a close family friend teaching my children about the rule. For my client, they wanted to double their nest egg in the next 7 years, implying that a 10% annual rate of return was needed. For my kid, they wanted to double their money in the next few months.

While my child’s aspirations are not possible without the binary risk of a roulette wheel, my client’s – despite being quite tough – are. However, it is important to note that while any one investment could theoretically achieve this, the risk is quite high.

If you manage to time things perfectly and pick the bottom of the stock market for instance, you may come close. The S&P has given investors an annualized return of over 13% since February 2009. Yet, if you go back prior to the financial crisis (January 2007), investors had to endure a 50+ % pullback, generally receiving returns in the range of 4.5% instead. Historically this has happened many times, and it is important to remember that when looking to the future, a 50% drop in value requires a 100% gain to break even.

So while doubling your money in 7 years is an ambitious yet achievable goal, is it prudent given the sheer amount market risk taken on? The answer is yes. Through proper portfolio diversification and the use of non-correlated investments, investors can achieve this lofty goal while protecting themselves from market volatility. For illustrative purposes, solely adding 35% of a commodity trading advisor (CTA) index such as the AMFERI (Auspice Managed Futures Excess Return Index) to the S&P gets you half of the way back to the goal at 7.4% annualized while also reducing the drawdown from 52.5% to 23.7%. This is but one change one that could help investors eliminate the risk of an insurmountable yet all too inevitable pullback.

Our advice? Not all diversification is the same. You need more than the long-term, low or non-correlated investments that are generally talked about within the industry. An investment strategy and portfolio requires negatively correlated products as well, especially at certain points in a cyclical market. This is what CTAs and Auspice do – provide investors with products that offer solid performance in times of need. It is our goal to continue to provide this benefit going forward into the unknown of the fall of 2016.

What is Trump? - July 2016

In the long list of market unknowns, Donald Trump and the US Presidential race is a “known unknown.” His candidacy has massive implications both socially and for the markets, but we are not sure of what they are.

The word “trump” has always held significant meaning. In cards, it outranks all else, and in life, it is used to show that you have an advantage over others.

As a surname, Trump is of English origin and has historically served as an occupational name for a trumpeter (from the Middle English trumpe or “trumpet”), which is an apt description for Mr. Donald J. Trump if you think about it. Since announcing his candidacy, Trump and his stances have taken centre stage both in America and abroad.

For America, and the world, the last name Trump is more than a word or strategy. Despite the criticism that invariably follows his comments, his campaign is no longer a political diversion. Simply put, he has a very real shot at the presidency.  But should anybody be surprised?  Like him or not, the man is savvy. He is adept at connecting with the masses through social media, and the nicknames he gives his opponents stick (i.e. “Lying Ted” and “Crooked Hillary”). While some may debate the appropriateness of his morally-grey strategy, his appeal to a wide range of Americans is no longer at question – whether you personally agree with his perspective or not.

It is difficult to gauge the effect that a Trump win would have on the financial markets given his reliance on rhetoric, and his lack of a decisive policy or plan at this time. The degree of uncertainty he has introduced to the world is high, and the domestic and international upheaval it may create is concerning.  As a result, it is highly likely that the ongoing volatility experienced across both the financial and commodity markets will continue for quite some time, and may even intensify.

In the long list of market unknowns, Trump and the US Presidential race is the unknown. The result of the election may have massive implications on the markets, even if we are unsure about what they are. When looking to commodities, a weaker US dollar will drive prices higher, but this may be offset by concerns over a slowing US economy. More broadly, a Trump win could have the following effects on specific markets:

• Equities: given the high level and multi-year rally, along with and artificially low VIX level, we expect significant volatility.
• Precious metals – likely to remain positive, reflecting heightened uncertainty and geopolitical risk.
• Industrial metals – investors may become bullish as it is expected that Trump would call for increased spending on infrastructure.
• Agriculture – prices of vegetables could rise if strict immigration policies affecting illegal workers are implemented, while the effect on global grains is difficult to determine.
• Energy – prices could go either way, depending on Trump’s protectionist agenda and political policies.
• Canadian Oil – as the largest foreign supplier of oil to the US, Canadian crude may continue to increase in importance given Trump’s desire to secure a safe supply for America, and his pro-pipeline agenda.

While Trump wants America to be energy independent, a Canadian supply of crude should be looked at favourably when compared to other sources. Moving away from Mexican and other South American heavy sour crude suppliers would provide advantages beyond safety and ethics. Pricing for these imports are not generated by transparent, open market systems, but rather set by their respective governments.  As such, risk mitigation tools like hedging are simply not available to market participants as they are for those who purchase Canadian oil.

As in life, you can only use a trump card once, and often as a last resort. Donald Trump has a very real shot at being elected because many voters see him as exactly that – a last resort. He has only one chance at this. Like Ross Perot, there will likely not be another run.

Donald Trump is clearly good at blowing his own horn, and a Trump presidency would certainly herald a period of significant volatility for the world’s commodities and financial markets.

Have a Plan - Jan 2016

'Everyone has a plan 'til they get punched in the mouth' - Mike Tyson, boxer

If you have ever had the good fortune to have visited Calgary before, you will know that weather forecasts stretching out much further than the next day are suspect at best. So when planning a day out, one is best advised to bring plenty of layers along…just in case.

Today’s economic climate demands the same levels of preparedness.

In January 2016, the S&P 500 dropped from 2044 on Dec 31st to a low of 1812 on Jan 20th and back again to 1940 by month-end. Intra-day swings unheard of a year ago have now become commonplace. The Fed ‘put’ has been put to the test.

By now, the pattern of ‘rescuing’ equity markets from precipitous drops has become fashionable and have spared many an investor from facing the harsh reality that at some point, the markets’ first responders may simply not show up.

What to do then?

Well, by then it will be too late. We suggest preparing portfolios in advance by having exposure to strategies that have the ability to preserve capital and generate positive returns in sustained negative markets.

The plan that works? Avoid getting punched, be patient and punch back.

What We Learned in Asia - Dec 2015

We recently toured Asia on a trip with AIMA (the Alternative Investment Management Association), which served not only to teach us much and open our minds, but validated our points of view on many things.
 
With respect to commodities and general investment, we have always believed that the time horizon for Asia (particularly China) isn`t the same as the North American investment timeframe of 3, 5 or 7 years. It is more like 33, 35 or 37 years, and this is exactly what we saw and heard from people on the ground throughout Asia including officials from the Hong Kong Exchange.  This sentiment was summed up brilliantly some time ago by the CEO of CPP, one of the largest and most respected investors in the region, who said: 'we don`t think in terms of quarters, but quarter centuries'.  
 
In response to their own significant investment in the region, one senior official highlighted they 'like to focus on the demand side of the equation long term'. We agree. The current state of commodities is oversupply, which is more favourable than a lack of demand because supply can adapt more quickly to falling price - and it has.
 
Based on our time in Asia, noting there are 300 to 500 million middle-class investors, we believe that the question is not whether demand is there or not, it is what impact this demand will have on the price of commodities and general investment in future. Keep your mind open.

"Buy when there is blood in the streets" - Nov 2015

You may wonder why we've summoned up that old Baron Rothschild quote now - after all, several equity markets have seen jaw-dropping gains in October and the market pressures in August and September are increasingly looking to be a distant and unpleasant memory.

It is because some of the market's greatest diversifiers and effective inflation hedges have been bloodied. And it may be time to rediscover the beneficial, long-term impacts that they can have on a portfolio.

Adding commodity-tilted exposure at this stage may sound like a risky proposition, but over the long run, the opposite has been more accurate. As a general asset category, it offers several portfolio benefits worth remembering - its low correlation to financial assets, its inherent inflation-fighting properties and its protective capabilities against global event risk. 

We are not making a 'call' on commodities (though we are bullish on their long-term prospects). Rather, we believe that commodities should form a permanent, strategic portfolio allocation. And while tactical considerations are important (timing, weighting, etc.) that role is best played by managers possessing specific investment expertise.

To learn more about the role that commodity exposure can play in successful portfolios, we invite you to read our recent research piece entitled "Are commodities still a valid inflation hedge in this low price environment?" by clicking on the image below.

A Rising Tide - Oct 2015

Last month, we had suggested that the market winds were beginning to strengthen and that we were poised to take advantage of them if they became more sustained, regardless of their direction.

That shift did begin to occur, enabling us to deliver a modest, positive gain in a month that was sharply negative for many asset classes (including equities) and capitalize on several short-term, negative market movements (see charts).

This uneasy market juncture provides a superb opportunity to assess the fitness of the managers that you have added to your crew. It is easy to lay claim to genius when tailwinds are blowing (as it has in the last several years), but does the same hold true during market turbulence? Did the managers you chose deliver the diversification benefits that you were expecting, or did their performance echo that of the broader market? How did they perform in 2014? Or in 2008?

Carl Icahn, David Stockman, James Grant and scores of others are expressing growing concerns about developing headwinds. If they are right, be sure that you have a crew with proven experience winning in those environments.

After all, a rising tide floats all boats, but are you prepared if the tide goes out?