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September 23, 2012 at 02:22 PM
Diversification remains the Holy Grail when it comes to managing client portfolios. An ideal diversifier would provide low-volatility, largely positive returns and low or negative correlations with clients’ existing assets, since the goal is to achieve an improvement in the portfolio’s risk-adjusted returns.
A recent white paper from San Francisco-based Forward Management makes the case that managed futures can accomplish those goals. Their argument: the Barclay Commodity Trading Advisor (CTA) Index has produced long-term returns that match the S&P 500 Index and outperformed the Barclays Capital U.S. Aggregate Bond Index.
During the 1980-2011 period, the CTA Index was slightly less volatile than the S&P 500. Plus, it has also significantly lower one-month maximum losses, as shown in the following table:
Comparison of Monthly Returns by Asset Class: 1/1/1980 – 12/31/2011
| Annualized Return |
Standard Deviation |
Maximum Monthly Decline |
Correlation to the S&P 500 |
|
| Barclay CTA Index |
11.16% |
15.07% |
-9.81% |
0.01 |
| S&P 500 Total Return Index |
11.06% |
15.62% |
-21.54% |
1.00 |
| Barclays Capital S.S. Aggregate Bond Index |
8.69% |
5.69% |
-5.92% |
0.20 |
Source: Forward Investing
These results have attracted the attention of both investors and funds. Forward Investing notes that assets under management by CTAs grew from $10.9 billion at year-end 1990 to $37.9 billion by year-end 2000; that figure grew to $314 billion by year-end 2011.
Caveats are in order, of course. Unlike stock and bond indexes, the CTA Index is based on the results of a peer group of managers, not price changes in a set of securities. That means your clients can’t simply buy the CTA Index as they can a traditional securities index.
The white paper notes, “As a peer group index, the CTA Index reflects the results of a representative group of investment managers who employ diverse strategies within the managed futures category—not the performance of a certain group of securities. Thus, results vary widely among strategies, and investment managers’ degree of success is dependent on their individual strategies as well as on market conditions. Futures prices can be highly volatile, and individual strategies are likely to be substantially more volatile than the CTA Index as a whole.”
