361 Capital Weekly Research Briefing
July 6, 2015
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA
It all starts with that first wave…
With the short week in the financial markets and recent long weekend for my U.S. readers, I thought that I would write something more specific with regards to how I look at the big asset classes and how I invest in them through my mutual fund.
When I started in this business 25 years ago, I was built to be an individual stock picker. And today I still enjoy adding value by picking off individual companies that others toss aside or ignore. But while individual securities can get wildly overbought or oversold on a short term basis, the bigger indexes, geographies or sectors cannot do so without a more significant, longer term commitment from many big investors. When you combine a directional fundamental thesis with a change in outlook from several very large institutional investors, you can have groups of stocks that can move for several quarters and/or years.
As an investor in all markets, I want my dollars to be in front of the groups that are working and find this rising tide of new investors. I also want to be far away from those groups or assets that are underperforming. Because my mandate does not require me to be 100% invested at any time, when specific asset volatility rises and returns underperform, I can move and sit in cash. Some would say that I should short the underperforming groups, but personally that is not my style and in an era of Central Bank easing, shorting would command a lot of my attention. I have enough work to do finding the best asset classes to be long and then adding value in the individual securities.
At the end of each month I present a monthly update with the whole firm on how the different asset classes have performed. Below is a simple chart of recent total NAV return for the major ETF asset classes that I follow along with thoughts on some on the individual assets. Maybe you will find it helpful to how you are constructing and positioning your portfolios.
(Total Return of the ETF NAV for period ending 6/30/15)
June was a difficult month for most every asset class as the Prime Minister of Greece surprised the markets with a referendum vote which crushed global Equities in the final days of the month. Only Ag Commodities, U.S. Small Caps, and Consumer Cyclicals managed gains. Bonds and Stocks declined, so just a difficult backdrop for anything but cash.
Looking at the individual assets:
DBA– Agricultural Commodities had a big June to make a strong Q2 helped by the large rains and delayed plantings of grains in the Midwest. Difficult to build a longer term case on the asset given the strong US$.
IWM– U.S. Small Caps did very well versus Global Equities. The strong US$ offered some help as did a demand for U.S. Financial, Healthcare, and Consumer Cyclicals which make up over half of the IWM ETF. With the backdrop of a stronger U.S. economy, higher rates and a rising US$, U.S. Small Caps should remain a go-to asset.
XLY – Consumer Discretionary is now positive returning for the month, Q2, YTD and 1 year. The group did pause when bad weather hit the U.S. at the beginning of the year, but now retail, home and auto buying seem to be picking up the pace. Even within retail, the higher end (Starbucks, Nike, Target) is outperforming the lower end (Wal-Mart) suggesting that consumers are trading up.
IGOV, EMB, AGG – Foreign bond ETFs are difficult to invest in right now as a U.S. investor. The International government debt is mostly a play on the US$ move given the very low yields. Emerging Market debt needs some more US$ stability and likely help from Energy prices given some of its largest issuers in the ETF. Looking in the U.S., the 1-3 month move in bond yields would suggest that big money is taking Bond chips off the table as the FOMC moves closer to a rate decision.
XLV – Healthcare continues to outperform and individual drug stories lead to Pharma/Biotech M&A while on the services side, most all companies are looking to date and get married to strengthen their competitive position in a post-Obamacare environment. The group continues to find buyers on every pullback.
XLF – As we wrote last week, U.S. Banks are rivaling Healthcare for a top performing position. Now with Ace buying Chubb, will the consolidation frenzy ramp in the Insurance sector? If only the ETF sector investors could rid the XLF of REITs sooner than 2016.
DBE – Energy commodities are still trying to build a base and find steadier prices. Imagine running a big integrated oil company and trying to hedge all the prices that you are planning on delivering on. Hedging must cost a fortune these days for them. Anyway, Oil is still moving with the US$, China growth and the varying political talks and actions in the Middle East.
XLP – Staples were once a good place to hide for yield and safety. But if the US$ is moving higher and Small Caps are leading U.S. equities then there is an appetite for risk which is why this money is heading to Consumer Cyclicals.
SPY – The performance of U.S. Large Caps has been like watching paint dry this year. Luckily there has been excitement in the individual sectors. But the market is no longer cheap by any historical measure (see Leuthold Group chart below) and so until Greece and the FOMC decisions become more certain, there is little to have the SPY put on a big short term rip higher. Of course, it has still been a better asset to own than U.S. Bonds.
XLI – Industrials have been a big tease for investors. Each time it looks like they are going to lead, BOOM, and a flat tire. While the US$ has an important impact on the machinery companies, it has been the transports that have caused the recent breakdowns. First it was railroads and their dependence on energy, then the truckers/shippers and weaker global volumes/port strikes, now it is airlines and capacity + DoJ worries. Always good sub-sectors and individual names to find here to invest in, but you had better leave the XLI ETF in the toy box for now.
EEM – Emerging Markets are simply not working. The carrot top move in China is perplexing. Could retail investors really matter that much to such a large market? Could the MSCI weighting decision really have been that important? Right when it looked like Chinese equities were going to talk the economy higher, they were Shanghaied. And then there is Brazil. And always there is the strong US$ and energy price uncertainty. This is another difficult asset to broadly allocate money into, but it isbest to find the individual names/geographies that you have conviction in.
DBP – Precious Metals are Gold or Silver and investors don’t seem to want to wear them or own them in any type of environment.
EFA – Europe, Asia, and Far East equities got punched by Greece at the end of June but are still outperforming Large Cap U.S. and Emerging Markets for 2015. With valuations still at a heavy discount to U.S., EFA should remain a place to be for equity investors. Now back to watching Greek news.
XLE – It is difficult to be interested in Energy when no one else is. Hardly any M&A and you don’t see the Vulture investors attacking yet; just too difficult to buy with the commodity price not settled yet. But it will at some point.
XLB – Materials should be doing better with lower energy prices, but the group also does have mining companies in it so go look at the prices of coal, gold and aluminum.
XLK – Tech has been held back by the large caps recently. Small and Midcap tech has done better. So what is your Apple estimate for the quarter?
DBB – Base Metals – When will China bottom, when will Europe ramp, what is your US$ estimate and still plenty of piles of metals in warehouses right now. Not even Copper’s Mom likes this ETF right now.
The Leuthold Group valuation measures chart that I referenced…
@LeutholdGroup: Old School #stock measures in 9th-10th #valuation deciles (historically expensive).
So now, back to your watermelon…
If you like the ideas Blaine Rollins shares each week in the 361 Capital Research Briefing…
Then you should learn more about how he incorporates these ideas in the mutual fund he is managing, the 361 Global Macro Opportunity Fund. Contact 361 Capital or your advisor for additional information.
In the event that you missed a past Research Briefing, here is the archive…
361 Capital Research Briefing Archive
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