1Q2014
Quarterly Commentary 1q14
Risk Paradigm Group seeks to defend capital through our ETF tactical strategies both domestically and in the Emerging Markets based upon the F-Squared AlphaSector ® Premium methodology. The below quarterly commentary is related to the RPg AlphaSector ® Core Domestic Equity and the RPg Premium FT portfolios available as separately managed accounts.
Overview
The first quarter of 2014 saw modest advances in most markets. The S&P 500 continued its winning streak and posted its fifth consecutive quarterly gain. Performance for the AlphaSector Premium Index was also positive for the quarter. However in most other respects, the first quarter of 2014 was anything but a continuation of 2013.
In U.S. equity, the quarterly gain was in doubt until the very end. At its low on February 5th, the S&P 500 had been down for 2014. In hindsight, it seems as if the contrast between this quarter, particularly its first half, and 2013 was not mere coincidence. Market psychology is always an uncertain subject, but it seemed that the emotional tenor of the market going into the new year was one of guilty foreboding, a sense that 2013 was better than it should have been and the compensating punishment was inevitable. Such expectations can often become self-fulfilling. And based on the continuing volatility in the markets, this feeling may have not left yet, even if the second half of the quarter largely cured the damage of the first.
The AlphaSector Premium Index began the year bullishly positioned, with allocations to eight of the nine sectors, lacking only utilities. For several weeks, this positioning was maintained, until early February, when in reaction to rising volatility and deteriorating price trends, the methodology eliminated positions in four sectors (both consumer staples and cyclicals, energy, and industrials) over just two weeks. This left the AlphaSector Premium Index allocated to only four sectors, the most bearish stance possible without a Short-term Treasury ETF (“cash alternative”) position. Had another sector turned “off”, the AlphaSector Premium Index would have begun reducing equity exposure. The energy sector was added back to the AlphaSector Premium Index at the end of February, making five sectors “on”, the state in which it ended the quarter.
Interestingly, the sectors that were allocated and not allocated do not follow an obvious theme, with energy, technology, health care, materials and financials “on” and consumer staples and cyclicals, utilities, and industrials out. Typically, the higher beta and economically sensitive sectors such as technology and financials are likely the first to be turned off, while the more conservative lower volatility sectors such as consumer staples and utilities are the last to go. The fact that this is not the pattern that has been seen may suggest that the current stress in the market may be more of a localized correction in prices rather than a broad market inflection point.
Outlook
Subjective forecasts of market outlook do not have a role in the AlphaSector quantitative methodology. As a result, it is not appropriate to make formal projections about the direction of the market and offer no opinion on the near or long-term future of the equity markets. It may be implied from the Index’s positioning, based on the output of the quantitative mode, of five of the nine possible sectors active at the end of the first quarter that there is a defensive stance for US Equity. By design, the AlphaSector output can change abruptly, and it is conceivable that some or all of the sectors now active could be removed from the portfolio in the near future. Whether the AlphaSector Index takes on a more defensive or aggressive positioning in the coming months remains to be seen.
By design, these sector exposures can change abruptly, and it is conceivable that some or all of the sectors now scoring positively could score negatively and be removed from the portfolio in the near future. Whether the portfolio takes on a more defensive or aggressive posture in the coming months remains to be seen.
Commentary Disclosure
Past performance is not indicative of future results. It is not possible to invest directly in an index. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third party sources and has not been independently verified. It is made available on an "as is" basis without warranty. Any projections, market outlooks, or estimates n this presentation are forward-looking statements and are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.
Risk Paradigm Group, LLC. d/b/a RPg Asset Management is a registered investment advisor with U.S. Securities and Exchange Commission (“SEC”). Additional information regarding Risk Paradigm Group, LLC can be found on our website at www.rpgassetmanagement.com.
“AlphaSector ®” is a registered trademark of F-Squared Investments, Inc. and is used with permission. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Risk Paradigm Group, LLC and F-Squared Investment Management, LLC or one of its subsidiaries (collectively, “F-Squared Investments” or “F-Squared”). F-Squared reserves the right at any time and without notice to change, amend, or cease publication of the information.
Investment products that may be based on AlphaSector Indexes are not sponsored by F-Squared, and F-Squared does not make any representation regarding the advisability of investing in them. F-Squared serves as the model provider to RPg Asset Management. There is no guarantee that an investor’s account will achieve its objectives or avoid losses. Inclusion of a mutual fund or an exchange traded fund in an index does not in any way reflect an opinion of F-Squared regarding the investment merits of such a fund, nor should it be interpreted as an offer of such a fund’s securities. None of the mutual funds or exchange traded funds included in an index has given any real or implied endorsement or support to F-Squared or to this index.
All AlphaSector Indexes represented in this material do not reflect the actual trading of any client account. No representation is being made that any client will or is likely to achieve results similar to those presented herein. F-Squared Investment Management, LLC or one of its subsidiaries is the source and the owner of all AlphaSector Indexes, and their performance information.
The AlphaSector U.S. Equity Index (“U.S. Equity”) is designed to provide exposure to the U.S. Equity market, and is constructed as an “asset allocation” overlay onto Exchange Traded Funds (“ETFs”) representing major sectors of the U.S. economy. F-Squared defines the inception date for U.S. Equity, the Premium AlphaSector Index and the AlphaSector Rotation Index as October 1, 2008.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
References to Non-AlphaSector Indexes
The S&P 500 Index is a broad-based unmanaged index of 500 stocks, which is widely recognized as a representative of the equity market in general.
Sources: Morningstar, F-Squared Investments. All rights reserved.
For more information including risks of investing in our strategies, visit our website at www.rpgassetmanagement.com
For more information on F-Squared and the AlphaSector Indexes, please visit www.f-squaredinvestments.com