THE VIRTUS VIEW

Good afternoon to all.

This communication is intended to add value to your life by helping you separate the real news from the white noise, understand the critical economic events that you read about every day and outlining  alternative investments which might be advantageous to you in these times.  We send this weekly e-mail to both clients as well as individuals we hope become future clients.  Thus, to my valued clients, since we use many alternative investments in your portfolio currently, some of the e-mails might discuss assets that you already understand.  It never hurts to review your knowledge of those investments.

Please feel free to forward these e-mails to any friends you have who you believe will benefit from learning more about finances and investments.

As we welcome in a new year, I wanted to introduce many of you to an alternative investment, which materially speaking has no correlation to the stock market. 

The wise investor needs to be prepared for both good and bad markets.  No one knows how long the current recession will last.  We have short-term bull rallies in bear markets and vice versa.  Knowing if a current up trend is just a short-term rally or a long-term new bull market is not known until after the fact.  We must be diligent in our diversification.  Diversification has helped us weather a horrendous market in 2008 and based on history, there is no reason to expect it not to help us in the future, regardless of which way the economy goes from here. 

First, let’s me explain how managed futures work.  Actually, in an article (“Checking In With Managed Futures”) written by Richard Bornhoft, President of Equinox Fund Management, he describes managed futures best:

“The basics of managed futures are relatively straightforward.  For years, large institutional investors harnessed the investing power of professional managers called commodity trading advisors (widely known as CTAs). These experts are highly skilled in navigating global futures markets for profit. Since the mid-1970s, individual investors have also been able to participate in the potential returns of futures trading by buying into futures funds that CTAs manage. The purpose of investing is simple: to allow everyday investors to benefit from the inherent and expected returns of managed futures and to diminish the effects of the volatility and risk associated with traditional stocks and bonds.

Managed futures have a mitigating effect on risk because CTAs operate in six sectors. Three sectors are related to financial instruments: world currencies, global stock market indexes and interest rates. These are by far the dominant areas of managed futures investing today. The other three sectors are based on physical goods: metals, “basic” commodities and energies. Within these six global sectors, a mix of long, short and neutral (cash) investing positions is employed, adding another layer of diversification and further reducing risk. Studies by academics and industry professionals alike have concluded that, as a result of this international, six-sector and long/short strategy, no other asset class is as diversifying for a traditional portfolio as managed futures. And in fact, their historical returns and performance have clearly shown to have a non to negative correlation to traditional equities.”

As Mr. Bornhoft explains, managed futures do not move in relation to stocks and bonds.  They can go up or down irrespective of how the stock market performs.  The following chart, illustrated in Mr. Bornhoft’s article, shows the returns using the CTA Asset Weighted Index, of managed futures during the last several bear markets.

And as of November 2008 the index was up over 17% while the S&P 500 was down over 38%.

More importantly is the impact managed futures has on diversification and risk of a portfolio.  As we state here at Virtus Wealth Management over and over, it is the risk adjusted return of a portfolio that is important.  Moderate and conservative investors want to eliminate volatility from a portfolio.  So let’s take a look at how managed futures help in that regard.

 
Source:  Petrac 2000

As the efficient frontier shows us above, historically, managed futures have increased the returns of a portfolio while simultaneously lowering risk (with the standard disclosure that past performance does not guarantee future performance).

There are many different methods to invest in managed futures.  Some are less liquid and/or more volatile or higher risk.  A recommendation of which avenue to invest in managed futures can only be provided after a clear understanding of your particular investment situation.

As I stated above, the wise investor is diligent.  Understanding the importance of diversification is a key part to being diligent.  We must look beyond traditional methods of diversification of just stocks and bonds.  Based on historical evidence, managed futures should be an essential part of a diversified portfolio.  Please feel free to contact me if you would like additional information regarding managed futures.

Brian Tillotson
Wealth Manager
 
Virtus Wealth Management
2435 E. Southlake Blvd
Suite 120
Southlake, TX 76092
817-717-3812
866-407-4320
Fax: 817-416-6585
www.virtuswealth.com

Securities and Advisory Services offered through VSR Financial Services, Inc. Member FINRA / SIPC
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To learn more about Virtus Wealth Management and how we may be able to help you, please visit our website or give us a call.  http://virtuswealth.com

Diversification cannot guarantee against losses in a generally declining market.

This commentary should not be considered as investment advice or a solicitation to buy.  You should consider your personal financial situation before investing.  Any offer or solicitation can only be made with delivery of the appropriate offering material to qualified prospective investors.  There are substantial risks with managed futures and commodities accounts. Returns generated from a commodity pool, if any, may not adequately compensate you for the risks you assume. You can lose all or a substantial amount of your investment.