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September keeps getting better. Now that the war in Syria looks like it is off and Summers isn’t going to be the next Fed Chairman the market is back in rally mode. Now that all that noise is behind us we are back to the only thing that matters—-US Stocks are the only game in town. Until that changes the potential returns from owning US Stocks outweighs the risks.
Positioning and Recent Moves
Income Strategies: Our Income Strategies are holding a lot of cash right now as there is not much that looks attractive in their investable universe. We did add positions in Dividend Paying Stocks this week as the downtrend in them reversed. The strategies are currently positioned to benefit from the current trend in the market (Up) and the current trend in interest rates (Up).
Trend Aggregation Strategies: The trading activity in these strategies has lessened over the past couple of weeks as the market has stabilized. We are currently fully invested in our equity momentum models in accordance with the market trend. Our counter trend models are fully in cash as the market is looking somewhat overbought in the short term. This cash would be put back to work if we have in any significant market weakness.
Momentum Strategies: These strategies are at their full equity allocations as the trend in the market continues to be up. Because of this, our Momentum Strategies are our best performing strategies for the month so far.
Specialized Strategies: Our 500 Strategy is 50% invested while our NASDAQ Strategy is 75% invested. Alpha, being 90% counter trend is 90% in cash based on the market being overbought in the short term. This cash would be put back to work in any market weakness.
Mutual Funds Try Very Hard to Hide One Statistic
An RIA we work with shared a short article about how mutual funds try very hard to hide their maximum drawdowns which then makes it impossible to calculate their MAR ratios. Maximum drawdown is your maximum peak to trough loss. For example, lets say you put $100 into a mutual fund in January, in August it was worth $200, and then in December it was worth $110. You actually made money for the year, you started with $100 and ended with $110, but it doesn’t feel like it. In August you had $200 and in December you had $110, you had a $90 drawdown which was 45%. We have long believed that risk should be measured by maximum drawdown, not nebulous figures like standard deviation, but I have never seen anywhere where you can find drawndown numbers on mutual funds. We even subscribe to the most sophisticated analytic package Morningstar has, we can run over 500 statistics on mutual funds, but I have never seen it report on maximum drawdown.
Why don’t mutual funds want you to know what their maximum drawdowns are? Because the numbers look ugly. From October 2007 to March 2009 the S&P 500 had a 60% drawdown. Since most equity funds don’t beat the S&P 500 it stands to reason that many were much worse. It is much better marketing for them to show risk measures like standard deviation because most people don’t understand that anyway, but they do understand a peak to trough of 60%.
In evaluating any investment the maximum drawdown can be used to calculate the MAR Ratio. The MAR Ratio is simply the average annual return divided by the maximum drawdown. For the past 10 years ended 9/13/13 the S&P 500 has an average annual return of about 7.36% with a maximum drawdown of 60%, that gives us a MAR ratio of .12. If you were evaluating an investment that could return 7.36% on average but could also drop 60% at any time you probably wouldn’t take those odds. MAR ratios should be 1 at a minimum, so if an investment had a 60% drawdown it should have a 60% average annual return. Now you understand why mutual funds don’t want you to know about maximum drawdown and MAR ratio.