Anchor Performance Update
A Longer Term View
April Rally is No Surprise
Absolute Returns for Unpredictable Markets
Anchor Absolute Return Mutual Fund
No one ever said this job would be boring, and so far in 2008 the markets have been anything but dull.
In just the first three months of 2008 investors have been treated to massive bank failures, rogue traders creating multi-billion dollar losses at French Bank Societe General, the pending threat of recession, and of course the recent bankruptcy/bailout/failure (whatever you want to call it) of one of the world’s largest clearing firms, Bear Sterns.
When the financial markets are well behaved, there are weeks and even months when my job could be described as “easy”. Unfortunately, this isn’t one of those times. These markets have required constant attention and discipline.
It wasn’t the easiest quarter I’ve ever had, but our disciplined adherence to our quant models has been rewarded.
Anchor Performance Update
While most mutual fund and separate account managers are now faced with the task of explaining large double digit losses to their clients over the past three months, our portfolios not only avoided market declines, but produced positive returns in the first quarter. Just as important, our volatility was less than half that of the indexes.
Here are the final results net of management fees:
Anchor Absolute Return Series First Quarter 2008
Net of Fees
| 2008 YTD Net of Fees | Gain | Drawdown | |||
|---|---|---|---|---|---|
| Stratus | +0.6% | -2.3% | |||
| Radius | +2.0% | -2.6% |
Market Indexes
| Gain | Drawdown | ||||
|---|---|---|---|---|---|
| S&P 500 Index | -10.0% | -10.0% | |||
| NASDAQ 100 Index | -14.5% | -16.3% | |||
| Credit Suisse Multi-Strategy Hedge Fund Index | -3.9% |
nytime we have a 10% advantage over the market indexes, we are extremely pleased. Yet with five consecutive negative months for the S&P 500, it may be time to for higher prices. Just as prices do not rise forever, neither do they fall forever- at least not before taking a rest.
A Longer Term View
It’s been quite a while since I have done some good old fashioned technical analysis in our commentary. So in order to get a clearer picture of where we may be headed, let’s back away from the noise of the headlines and take a longer term view of the markets.
The chart below shows the price of the S&P 500 over the past 12 years, along with a 20 month moving average of price and 2 standard deviation Bollinger Bands. When combined with a simple 20 month moving average, Bollinger Bands can be effective in measuring volatility and establishing potential price targets.
S&P 500 Index Monthly:
1995 - Present
During BULL markets, prices will usually fluctuate between the middle band and the upper Bollinger Band, in this case a 20 month moving average. During BEAR markets, prices will usually fluctuate between the middle band and the lower Bollinger Band. The 20 month moving average then becomes an important “line in the sand”, delineating the overall price trend between Bull and Bear.
Notice that during the Bull market of the late 1990’s the S&P 500 remains above the 20 month average, for years on end.(Shaded in green. Clearly the primary long term trend for the S&P was up. Notice however that once the 20 month average is penetrated to the downside in late 2000, the primary trend turned lower, and remained that way for 2 ½ years. (Shaded in Red.) From September of 2000 through April of 2003, the S&P fluctuates between the 20 month and lower Bollinger Band.
S&P 500 Index Monthly:
1995 - Present
April Rally is No Surprise.
Using this simple methodology it is clear that the S&P 500 was due for some relief from the extreme declines of the past five months. With 3 consecutive months below the 20 month average “line in the sand”, the S&P is clearly in a Bear trend. In March, the S&P also penetrated the lower Bollinger Band. With that downside objective reached, the next target for the S&P 500 is an attempt to get back above the 20 month average, currently at 1433.
(With the S&P currently at 1376, I realize that calling for an S&P target of 1433 is a mere 4% higher. Not a real bold call on my part. Of course when I first began showing this to a few clients and traders at the beginning of the month, 1433 represented close to a 10% advance. Quite simply, they thought I was nuts.)
Keep in mind that historically the most explosive rallies occur during Bear markets, when selling pressure simply becomes too extreme. (Example: January 3, 2001 when the NASDAQ 100 explodes +18.8% in one day amid the second worst Bear market in history.)
Just as well, some of the most devastating declines have occurred during Bull market trends when stock prices reach extreme valuations. (Example: October 19, 1987 when the S&P 500 declined -20.5% in one day in the middle of one of the greatest Bull markets in history.)
For now, our models continue to expect higher prices over the short term. The 1400 represents strong psychological resistance to the S&P 500, and I would expect quite a battle at that level. But keep in mind that whether the S&P can overcome 1433 or not, the primary trend still remains down.
Which brings me to an important point.
Absolute Returns for Unpredictable Markets
There is nothing in my view (or the view of many other analysts which I respect deeply) that says market volatility is going away anytime soon. With the globalization of equity markets, capital and order flows move seamlessly across the globe, following a perpetual time zone of market trading hours. The result is markets that can and do respond to information much more quickly than at any other time in history. The trends remain, but the speed has picked up exponentially.
Yet no matter how markets change and evolve, an investor’s need for retirement and pension accounts to grow remains the same.
The evolving new paradigm of markets makes risk management's role even more critical. The worst investment strategy I can think of is one that depends on a perpetual rising market to generate returns. Now more than ever, investors need absolute return strategies- investment techniques designed to benefit from rising, falling and flat markets.
Hedge funds and large institutions have been benefiting from absolute return strategies for years. Our mission is to make these strategies available to the investing public. And we are succeeding.
The performance of our portfolios during the first quarter is about as strong an argument as I can make. If you would like information on our Absolute Return portfolios including investment minimums, fees and historical performance click here.
Until next time,
Eric Leake
Chief Investment Officer,
Anchor Capital Management Group, Inc.
http://www.anchor-capital.com
Chief Executive Officer,
Anchor Research, LLC.
http://www.anchor-research.com
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Disclaimer
Anchor Capital Management Group, Inc., is a Securities and Exchange Commission Registered Investment Advisor. Opinions expressed are not to be construed as a solicitation to buy nor sell securities.
*Anchor Capital utilizes a tiered fee schedule that offers lower management fees to accounts with higher balances. Any investment returns presented are calculated gross of fees utilizing actual accounts which represent a model strategy. Individual returns may vary substantially from those presented due to differences in the timing of contributions and withdrawals, account start dates, and actual fees paid.
Past performance is not a guarantee or indication of future results. Presentation is for informational purposes only and no guarantee is made as to the accuracy of this information by Anchor Capital Management Group, Inc.