Client portfolios were positioned in line with our thesis of being in the mid-cycle portion of a cyclical bull market that began in ‘09. We expected a sideways, range-bound market, where a more active trading strategy would be most appropriate.  Simultaneously, we remained alert to the possibility of a renewed bear market.

At a more detailed level, we planned for the resumption of the US dollar decline, after a short surge during Q2, resulting in a boost to foreign holdings and commodities.  We also targeted greater returns in high-yield fixed income, while shorting US treasuries on expected further recovery in the economy.

What worked?

Our expected scenario did in fact play out for the quarter, albeit with a higher level of sideways volatility. As a result, we were able to make a number of key trades for our active client portfolios.  Specifically:

  • We caught a late July rally and locked in our gains by selling some holdings.
  • We bought back in on a dip in August.
  • We employed our new VXX trading strategy, which buys and sells volatility based on overbought or oversold market conditions.

Our foreign equity and commodity holdings also performed as expected, driven by a renewed US Dollar decline.  In particular, emerging markets, frontier markets, and Asia-Pacific equities all significantly outperformed.  Agriculture, metals, and gold all outperformed as well.

In fixed income, our high-yield holdings produced strong dividends and offered stability during market declines.

Finally, some of our deep value small-cap positions rebounded nicely in Q3.  We believe there is more room for these to run, albeit they are volatile performers.

What didn’t work?

Our short US treasuries position underperformed, as risk aversion returned to markets.  Global investors continued moving heavily into this “safe” sector, and the US Fed restarted purchasing treasuries to stimulate the economy.  However, the multi-decade run in treasuries is near an end, and we believe the asset class is severely overvalued.

It is only a matter of time before the immense potential of being short treasuries should be realized.  This position could work in either the rosy scenario of a strong economic rebound or the Armageddon scenario of a deepening debt crisis with corresponding rising rates.  Until then, we hold this position as a long-term investment.

Additionally, our natural gas position underperformed.  Despite our belief that natural gas is significantly undervalued, we have been too early in owning this commodity, and await the upside catalyst.

Net Results

Positives far outweighed negatives, and consequently client portfolios advanced handsomely.  More importantly, clients did not succumb to fear, but rather stuck with their plans for long-term saving and investment, despite the heightened market volatility.  The reward for this behavior was a boost to net worth during Q3, while many others clung to incredibly low-yielding assets such as cash.

As always, we invite clients to continue focusing on long-term, risk-managed growth, holding strong through the temporary dips along the way.