Friday, August 30, 2013
Pimco’s Gross Jumping Into Managed Futures
It has been cited so many times by so many people that you would think its underlying logic would be ingrained into the U.S. investors’ psyche but markets are irrational because people are irrational so no matter how many times someone has heard this piece of wisdom, there is a tendency to jump on investment bandwagons when the trend is long in the tooth and bail or stay out of underperforming investments right when they are ready to take off.
I am following one technician who thinks the stock market is close to topping but he is waiting for the last doubters to jump on the bull bandwagon before he puts out a sell signal.
Over the past few months I have been hearing a lot of pouting regarding managed futures. A lot of managers are having a hard time raising money because of poor recent performance and some are paring back their marketing efforts. The asset class suffered down years in 2011 and 2012 — the first back to back down years in the history of the Barclay CTA Index — and it is struggling midway through 2013 as well. The normal stories are being written, i.e. “Is Trend Following Dead,” and “What is wrong with Managed Futures.”
The correct answer may be, “I don’t know,” but anyone who understands the nature of the trend following beast also should understand that now is the ideal time to get in. Critics of the trend following approach like to point out that most investors don’t participate in the often strong returns of successful managers because of the tendency to get in after strong performance and get out after drawdowns.
First off I am not so sure the average investor is as dumb as some of these critics assume them to be. I have been examining money flows in CTA databases for more than a decade and noticed years ago that often money under management leaves following strong performance and returns following a drawdown.
Warren Buffett is not the only smart guy out there.
But the underlying logic of that criticism, and Buffett’s philosophy as well as the nature of trend following says that now is the time.
Why bring this up? Well another well-known investment guru, close to the stature of Buffett, has decided now is the time. Investment News reported earlier this week that massive bond investment firm Pimco, founded and managed by Bill Gross, has filed a preliminary prospectus with the Securities and Exchange Commission (SEC) for a managed futures mutual fund named the Pimco Trends Managed Futures Fund.
The story points out the poor recent performance of managed futures but does note there have been some successes. It also points out that Pimco has made a point to add to its alternative portfolio since 2008, nearly quadrupling assets in alternative mutual funds, from $28 billion to more than $100 billion.
Has the market changed? Yes, markets always is change as Bill Eckhardt once told me. But remember so does managed futures. The beauty of it as an asset class is that it is not monolithic. There are literally hundreds of thousands of models looking to profit from trends in futures markets and while they may all end up in the same place when you have major trends, they get there in different ways. That is proven by the substantial number of managers that loosely fit in the trend following mode who have performed well over the recent difficult environment. These are not long only mutual funds but largely systematic strategies built to detect trends of varying time frames, in a mixture of up to 70 or so markets, with multiple risk management overlays. Yes there are better and worse environments for trend following and managed futures but these are truly absolute return vehicles that cannot really be benchmarked.
A perusal of CTA performance shows definite weakness in the last 30 months, roughly 60% of managers have a negative compound annual return since January 2011. But there are 51 managers with a compound annual return of greater than 10% in that time (out of a universe of 493). I have profiled 16 of them in the last few years.
Gross took a hit to his reputation back in 2011 by being a couple years early on his call for rising interest rates. I don’t think he is too early here and I feel a little better when I advise folks in the industry to make its push now for more assets. I am in good company.
Posted by Bud Fox at 9:10 AM