IN REVIEW | March 2010 ROE Capital Management Performance
Editor’s note: I apologize for the lateness of this update. I was traveling at the beginning of the month and unable to process the newsletter prior to the holiday.
As US Equity markets drifted higher and volatility drifted lower in March 2010, our programs turned in their lowest monthly trading volumes since inception, trading in only a handful of sessions. When equity markets move higher slowly, with very little selling pressure or pullback, our algorithms tend to trade less often. As such, we found few opportunities and posted a slightly positive month in both of our programs.
The small positive month extends the winning streak for our Jefferson Index Program to 13 consecutive months and marks 12 consecutive months of gains for our Monticello Equity Spreads Portfolio. In the past 12 months, our programs have crept into the top rankings for all CTAs in all asset classes. Looking at the 1,083 CTAs reporting to Barclays, our programs are in the top 6% of all CTAs ranked by their returns in the last 12 months, as well as by their 2010 year to date returns.
However, as we noted in our annual review, analyzing a managed futures investment by return only does not provide the full picture, as it does not factor in the risk taken to produce the returns. Considering that there are managers ranked higher by return than ROE Capital who have compound average returns of 12% and draw downs of 89%, it is necessary to account for risk when looking at these rankings. When ranked by Sharpe ratio (a measurement of the risk premium of a strategy), Jefferson is in the top 10 of these 1,083 CTAs reporting to Barclays for the last 12 months (ranked 7th in February and 10th in March*), and Monticello follows close behind in the top 20. If you look at stock index trading CTAs, Jefferson is the number one trading program ranked by Sharpe Ratio in the last 12 months and Monticello is the number three program.
This of course constitutes the best 12 months for both of our programs. Investors would be exceedingly lucky had they invested last March, picking our bottom point and catching the best 12 month performance for our firm. Therefore, it is also instructive to look at the worst 12 month return for both programs, as well as their averages.
IN FOCUS | April 2010 Market Outlook
As we thought, the S&P charged ahead through 1150 and beyond in a market without much in the way of institutional guidance. The market is now exhausted, severely overbought and looking for a little pullback. After the start of the month/quarter buying exhausts, we should see some selling from profit taking, federal and state tax deadlines and the strong tendency for equity markets to decline after the March expiration. However, as has been the pattern for the past few quarters, a few months of rally begets a sharp but brief sell off, followed by more rally. Without news, we should be range bound between 1164 and 1210 but, in the near term, equity indexes should move higher.
The recovery remains soft and the sovereign debt crisis lurks a negative backdrop, but the severity of the debt picture is unfolding slowly. As it does, an interesting dynamic is playing out. Capital flow is shifting from US treasuries to corporate debt and stocks, as the bond market tells us it may be safer to lend money to some US corporations than to US and state governments. Much hay was made over the Bloomberg news item that two year bonds from Berkshire Hathaway commanded lower yields than two year treasuries. Indeed this makes sense; if the blue chips and their ilk are deemed too big to fail (perhaps soon by law), they are backstopped by the US government which can print money and raise taxes to shore up its corporate dependents. But the US and state governments are recklessly spending and adding to their long term liabilities, which makes lending to them risky. Corporations account for future liabilities on their current balance sheets. Governments do not. In the near term, sovereign debt uncertainty favors capital flow to US equities and higher stock prices. This will reverse in the long term as the cost of these liabilities weighs on the living standards of those forced to pay for them.
For now, money is free and stocks are cheap to cash. Why not borrow money and buy stock (or anything for that matter)? Since stocks are one of the few assets producing yield, we are watching an equity bubble inflate. Emerging markets attempts to cool growth also favors increased capital flow to US equities. The political backdrop in the US has steadied the market as well; though the health care package crowds out private investment and will inflate costs (through de facto price controls), its passage removes what the market despises most: uncertainty.
As the market consolidates ahead of its next move, we anticipate few trading opportunities for our programs. April will likely be a month of low trading volume for us, though we should trade a bit more than March.
A NOTE ON PERFORMANCE
There was a revision in our February performance for the Monticello Equity Spreads Portfolio. We originally reported the February performance at 5.72% and it has since been revised up to 6.57%. It is incumbent on us to explain this revision, as we are not in the habit of reporting erroneous information, especially when it comes to our performance. Our accountant—who is an exceptional professional—did not err in the calculation of performance. He simply reported the performance for our second program, the Jefferson Index, on the wrong form.
Normally we would have caught the mistake prior to publishing the performance numbers, but it was in line with our expectations of performance for the program. Though it is unusual that both programs would have the same performance in a given month, they have had the same results before (see August 2009). Only during the billing of client accounts did I notice that no Monticello account performed under 6% for the month—of course that meant Monticello on the whole could not have performed below 6%. The problem stemmed from a cell on an Excel sheet in which our accountant had previously manually entered performance. He manually entered the performance of our Jefferson program in the Monticello program’s summary. He has since linked the cell to tabulate from the billing performance sheet, so this mistake will not happen again.
I want to stress how seriously we take the calculation and reporting of our performance. If you have any questions about this or any other matter, please feel free to contact me at your convenience.
John L. Roe
President, ROE Capital Management
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.An investment with ROE Capital Management is speculative, involves a high degree of risk and is designed only for sophisticated investors who are able to bear the loss of more than their entire investment. Read and examine the disclosure document before seeking ROE Capital Management’s services.