Seeking Alpha

Roman Chuyan, CFA's  Instablog

Roman Chuyan, CFA
Send Message
Roman Chuyan, President Model Capital Management LLC is a tactical investment manager. As opposed to buy-and-hold strategies that follow the market's ups and downs, tactical management adjusts the asset mix in order to reduce the market downside, but to participate in the upside. Model Capital... More
My company:
Model Capital Management LLC
My blog:
MCM's Updates
View Roman Chuyan, CFA's Instablogs on:
  • Tactical Strategies: Good Q3 Performance, Exceptional 12m
    • In Q3-2013, our two Stocks-Bonds strategies achieved 4.4% return, outperforming their 60/40 benchmark by 0.9%. The Complete Market strategy underperformed somewhat, with 3.3% return.
    • In the past 12 months, relative performance over the 60/40 benchmark ranged from 8.0% (for Stocks-Bonds) to 18% (for 2xStocks-Bonds).
    • Over a ten-year simulation period, the strategies outperformed by a minimum of 8.8% (for Stocks-Bonds), while reducing downside risk - by half in the case of the two un-levered strategies.

    All Model Capital Management's tactical strategies started Q3-2013 with 100% equity allocation to the S&P 500 (NYSEARCA:SPY). The allocation moved to all-bonds in mid-July, then back to all-equities in September. This was based on the return forecasts for the S&P 500 by our PAR Model™ turning negative to -1.0% in mid-July. By forecasting 6-month return for equities, the model is designed to help avoid major market declines. However, the August drop in U.S. equities proved to be short-lived. The PAR Model™ correctly identified that as well, and turned back to positive 2.4% forecast on August 31st based on continued strong real estate market factors, and improved valuation ratios. So far, this bullish turn by the model proved to be accurate as the S&P 500 rose by 3.2% in September.

    Figures represent model performance, not performance for any client portfolio or account. Actual performance may vary depending on timing of account transactions, fees, expenses and other factors.

    Q3 ended up being challenging for tactical investing as bonds, typically a safe investment, were hurt by rising interest rates. During the 1.5 months that our portfolios were allocated to 7-10 year corporate bonds (NYSEARCA:LQD), their price dropped by 2.0% (see chart below). This contributed to Q3 performance being respectable at 4.4%, but not as high as we would have expected based on the precise forecasting by our equity model. The Complete Market strategy underperformed the other portfolios, with 3.3% return. While the allocation to Mid-Cap equities (NYSEARCA:IJH) helped its performance, the substantial allocation to the Mortgage REIT index ETF (NYSEARCA:REM) hurt. REM ended roughly flat for the quarter after the 3.5% quarterly dividend.

    Q3-2013 Price Returns

    12-month performance continues to be exceptional for all strategies. The period started with the PAR Model's™ 10.1% 6-month return forecast for the S&P 500 at the end of September 2012, which continued to increase, culminating in a 19.2% 6-month forecast in November. This was hard to believe at the time but proved to be incredibly accurate - the S&P returned 16.3% over the following six months.

    All strategies were fully invested in stocks from the beginning of the 12-month period, and the 2xStocks-Bonds strategy was invested in 2x-levered (NYSEARCA:SSO) position for as long as the model's forecast stayed above 5%. The all-stock allocations lasted until our March 15, 2013 report, when we changed to the 60/40 benchmark allocation.

    Disclosure: I am long SPY.

    Nov 25 3:50 PM | Link | Comment!
  • Does Earnings Slowdown (2.1% In Q2) And Elevated Valuation Mean Lower Equity Prices?

    The Q2 earnings growth rate is a disappointing 2.1%. Analysts' consensus a month ago was 0.6%, and one would expect a 4% bump on top of that because reported earnings typically exceed estimates by an average of 4%. However, as the earnings season progressed, companies beat expectations by a lower-than-average amount.

    Looking at sector performance, Financials continued their strong lead in earnings growth this quarter (28% YoY growth). Materials (-9.5%) and Energy (-9.2%) were the worst-performing sectors. The IT sector (-8.0%) was the third lowest earnings growth sector.

    Expectation for Q3 is starting to look bleak. In this reporting season, with 80% of companies having issued negative guidance for Q3, analysts reduced their Q3 growth expectations to 4.3%, and that of Q4 to 10.8%.

    In their earnings calls, companies continued to be concerned about FX rates and soft export markets. The negative effect of higher payroll taxes in the U.S. was previously expected to wear off in 2H-2013 but this never materialized. The new concern this quarter is that higher interest rates will suppress earnings of the Financial sector.

    The P/E Ratio is one of Valuation factors (out of the total 22 factors) in our quantitative forecasting model (the PAR Model™), which our tactical strategies are based on. Though we use the actual trailing 12-month earnings in the model (to eliminate forecasting noise), we also track earnings growth dynamics in order to help our clients, and us, understand important trends in earnings and valuation. Valuation ratios (P/E and Price-to-Book) have been elevated for some time as a result of the strong rally in U.S. equities in 2012-2013. In February 2013, the Valuation group of factors turned negative in our model, which contributed to the overall return forecasts for the S&P 500 turning negative in July - very important for tactical/TAA strategies.

    If tactical management is part of your strategy, you may be interested in adding our systematic, model-based approach to your set of tools - sign up for a free trial of our U.S. Tactical Strategies research service for investment managers.

    Aug 29 4:02 PM | Link | Comment!
  • S&P 500 Return Forecast Turned Negative In July, Portfolio Reallocation Recommended

    In mid-July, our return forecast for the S&P 500 turned from positive to negative (-1%). This had significant implications for our recommended Tactical Strategy portfolios.

    Our tactical strategies are based on forecasting of near-term returns using our quantitative forecasting model (the PAR Model™). The model includes fundamental-type explanatory factors categorized into Valuation, Macro-Economic, and Market factor groups.

    According to the model, the negative return forecast was mainly the result of the negative contribution of valuation factors - earnings and price-to-book ratios were pulling down the return forecasts. The contributions of valuation factors to the return forecast had turned from positive to negative back in February 2013. The effects of these factors on the forecast continued to grow more negative as the S&P rallied very strongly, while earnings entered a slow-growth phase.

    (click to enlarge)

    Market factors also contributed negatively to the return forecast. Individual investors turned more bullish as concerns about the Fed's tapering subsided and equities reached a new all-time high. Crude oil price rallied in July, negatively affecting the equity market return forecast.

    Conversely, economic factors had a positive effect on the return forecast. Among these factors, housing indicators were the main positive driver. However, the positive effect of economic factors was not strong enough to completely offset the negative factors above.

    Given the negative 6-month return forecast, equities were expected to underperform fixed income while having higher risk. The corresponding optimal risk-return allocation was clearly in favor of fixed-income. Accordingly, we changed our recommended Stocks-Bonds allocation from 60% stocks to 100% fixed income.

    For more details on the latest return forecast and the current tactical strategy allocations, please sign up for a free trial of our U.S. Tactical Strategies research service for investment managers.

    Aug 27 11:03 AM | Link | 1 Comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.