Concert US Equity Large Cap Index
October 2014 Performance Report
Concert is a risk-protected investment strategy designed to provide investment exposures that avoid downside risk associated with turbulent markets. The Concert U.S. Large Cap Equity index is designed to produce returns close to the level of the S&P 500 during periods of positive performance and reduce exposures during periods of market stress.
Dear Friends –
October was a difficult month for most equity investors. The deep V pattern in equity prices was a major “whipsaw” that confounded enough investors to drive bond yields to their lowest levels since May, 2013 (1.99% on the U.S. Ten-Year) and raise speculation about the end of the bull market run. When investors decided that the decline was actually a buying opportunity, volatility did not dissipate quickly. The rebound was as severe as the decline. A sharply reversing price pattern represents a difficult scenario for our Concert system that prefers to wait until markets calm down before signaling market re-entry.
After a steady period of low and uncorrelated risk throughout most of the summer and the month of September, volatilities picked up during the early part of October. On October 7, we went to cash in four of the ten sectors of the S&P 500. Two days later on October 9, our Concert System called for the other six sectors to move to zero exposure and for the first time since the Greek crisis in the fall of 2011, we invested 100% of portfolio assets in cash. The market dropped precipitously as the 10-year Treasury absorbed much of the US Equity retreat and the yield crashed below the 2% level.
Usually we expect a rapidly declining market to either dash the hopes of investors and change their sentiment about the long bull market run, or observe some consolidation in risk levels before resuming a positive trend. This time was different. Market volatility was stubbornly high during the first part of the prodigious rally that began on October 17. A week later, when risk declined almost as quickly as it rose early in the month, the pace of change moved Concert to re-establish sector exposures at various less correlated steps as the market improved. We re-engaged with the market beginning on the week of 10/20 to build a 100% equity position. The point of exit and entry were not hugely different; we were able to demonstrate our ability to effectively manage risk rather than time markets. In an environment hostile to our discipline, the system performed well, showing a profit for the month while substantially improving peace of mind during the turmoil. If the market had continued to spiral downward, we were comfortably in cash. When it bounced, we were still able to participate in the month-end rally.
Concert performance showed a point lower return than the SPX @ +2.65% vs +3.69%, but a reduction in volatility of 42% from 17.7% for SPX to 10.2% for Concert. The largest peak to trough loss for Concert was just over 2% vs. 5.4% for SPX. Protecting capital is our job and in a tough environment, the Concert program worked well.
The attached charts show the sector results.
On Another Note:
We are putting risk to work in an emerging markets portfolio utilizing our Concert Strategy to offer a new, improved way to gain exposure to markets that have substantially underperformed over the past several years. Our daily risk measurement and allocation is expected to provide investors with extended diversification and market scrutiny not currently available in the emerging market space.
Let us know if you have questions or would like to learn more.
Best regards –
Ferrell Capital Management is considered one of the leading experts on financial market risk management. Since inception in 1988, the firm has developed many of the currently recognized risk allocation and budgeting methodologies and advised many blue chip institutions on their practical application to portfolio management.
FCM combines financial engineering and risk management expertise to actively manage the Concert Equity program. At FCM, managing allocations to strategy types and individual hedge funds is a dynamic process that anticipates changing market conditions. FCM is uniquely qualified to provide customized Alpha solutions for institutional investors.
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The gross and net results in FCM Content are based on simulated and hypothetical portfolios the resulting returns of which have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Because the trades assumed in this document have not actually been executed, these results may have under- or over-compensated for the impact, if any, of certain market factors such as lack of liquidity or the ability to obtain the execution prices that have been assumed. The Net Asset Value (NAV) of any model portfolio are based on valuations calculated in dollars. All performance results include reinvestment of dividends. Valuations are computed and performance is reported in U.S. dollars. All performance results are inclusive of reinvestment of dividends. Model returns are net of 1.25% management fee and reflect trading costs and brokerage fees. The brokerage fees are $0.005/closing security price multiplied by the change in the percentage of the security position relative to the NAV. This represents an estimate of $0.005/share in trading costs. Actual client account performance may differ significantly based upon the level of trading costs and/or brokerage costs charged by a particular custodian or adviser. In addition, client performance may differ based upon the structure of a particular investment program. For example, some programs are structured as a wrap fee program in which trading costs and brokerage commissions are included in one all-inclusive wrapped fee. As such, these costs may be higher than if the client were to pay trading costs and brokerage commissions separately. Deviation from the model’s diversified structure may result in different risk, return, and diversification characteristics and would therefore not be representative of the models.
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