Quarterly Commentary 2q13

The AlphaSector Premium strategy entered the second quarter with all nine sectors engaged and exited the quarter the same way – however, five sectors moved closer to elimination by the end of the quarter. 

There was increased volatility in the quarter – with the Dow Jones Industrial Average experiencing 11 three-digit swings in the 17 days that followed the May 22nd announcement by the Federal Reserve that it would possibly scale back on the treasury-buying program. 

After setting a blistering pace in the first quarter of 2013, the US equity market provided more muted gains in the second quarter, with the S&P 500 Index gaining 2.91% in the 90-day period. Probably more important than the absolute number was that fact that the broad market peaked on May 21st and declined approximately 4% in the balance of the quarter. Whether the May 21st date will become 2013’s peak remains to be seen, but it’s clear that the US equity market lost some of its steam in the closing weeks of the second quarter. 

A number of factors, including the Federal Reserve’s statement in May that it may reduce its bond-buying program and the back up in yields (the 10-year treasury bond yield increased 34%  from 1.87% at the beginning of the quarter to 2.52% by June 30th) caused some consternation among investors. Offsetting some of these concerns was continued good news on the housing front as well as benign inflation levels.  

As noted above, there was increased volatility in the quarter. At the sector level, volatility was especially high in Consumer Staples, Utilities and Health Care. 

All nine sectors remained on in AlphaSector Premium for the 90-day period, although five were weak as the quarter ended. With all sectors on in the quarter, performance differences versus the S&P 500 are primarily due to sector weighting differences. The S&P 500 is capitalization-weighted while the AlphaSector portfolio construction rules call for equal-weighting at the sector level (at rebalancing). Currently, this results in AlphaSector Premium having an overweight in Utilities and Materials and an underweight in Technology and Financials, when all sectors are engaged.

In the second quarter, the overweight in Utilities hurt performance, as that sector was the worst performer, declining 1.75%. The underweight in Financials also contributed to relative underperformance, as Financials was the strongest sector, advancing 7.19%. 

Overall, six of nine sectors advanced in the quarter, while three declined. It is noteworthy that cash equivalents have not been employed in AlphaSector Premium for domestic equity since the fourth quarter of 2011. 

Because all of the analysis that is done for AlphaSector Premium is quantitatively-based and all of the data is historical in nature, it is not appropriate for formal projections or outlook statements. However, some potential insight can be gained by looking at trends in volatility and overall positioning. 

Last quarter marked being in the fifth year of recovery since the S&P 500’s low in March of 2009. In April, all domestic sectors were still engaged with only one showing signs of weakness. A shift in tone during the second quarter in the US equity market has been observed. While the second quarter resulted in a positive advance, investors are less sanguine, and volatility moved up in the quarter after the Federal Reserve mentioned they might curtail the treasury-buying program. As noted earlier, five domestic sectors were close to elimination at the end of the quarter. 

Of course there is no way to know if the recent spike in volatility and less robust price performance will continue, or whether it will return to the stronger equity market witnessed earlier this year. Whatever direction the sectors of the equity market take, the AlphaSector Premium quantitative engine is designed to reflect those trends in the constituents of the portfolio, with its primary mandate being loss avoidance.

Past performance is not indicative of future results. 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. 

 “AlphaSectorTM” is a 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 RPg Asset Management 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. One cannot invest directly in an 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. 

Sources: Morningstar, F-Squared Investments. All rights reserved. 

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