The Covestor Rockledge L2 Portfolio continued to hold positions in the Select Sector SPDR Industrials (XLI), Healthcare (XLV) and Consumer Discretionary (XLY) and Financials (XLF) ETFs through the month.
These positions have really stayed stable since the portfolio's inception in July. This longer holding period is typical for our L2 strategy, which tends to react to changing fundamentals much slower than many other programs.
Since inception late July 2013, the XLI holding has led performance, gaining over 16% to the S&P 500 Index's (SPX) 12% return. In contrast, financials trailed the S&P for the half, up just 6.6%. Financials include banks and insurance companies, which have been very volatile given interest rates and global tension.
These gains were offset by underperformance in the healthcare (XLV) position. Healthcare stocks, which includes companies like Johnson & Johnson (JNJ), Amgen (AMGN) and United Healthcare (UAHC), has been volatile of late, likely influenced by the recent politics and the changes in coverage.
Typically, the strategy would hold just three positions. With the market rally (over 10% for the quarter alone and more than 30% for 2013), Rockledge has witnessed higher correlations than usual across the sectors. As such, we have taken a more diversified approach.
The Rockledge L2 strategy takes a longer term view on the markets, developed by analysis of corporate fundamentals (earnings and revenues), the macro picture (interest rate levels and spreads), and price change data (momentum).
We continue to face a "risk on / risk off" mentality, focusing on events, which are out of the investors control. Events in Europe, China and in emerging markets have a more profound impact on the US markets than they did 10 or 15 years back. These events are often hard to see coming.
We have seen a flow into equities, precipitated by the end of the bond market rally. With rates expected to rise, professional allocators are shifting from fixed income to equities, which drives up the price of all stocks.
And, finally, what we at Rockledge see as a warning sign, but likely good news for a strategy like Rockledge L2. The New York Times recently profile a 16-year-old boy who doubled his money trading stock in Twitter (TWTR), the social media firm that has no earnings.
Greed has trickled down from the Wall Street to retail investors. Everyone, it seems, wants to take part in the easy money that a 30% run in the markets can provide. In my opinion, it is eerily reminiscent of 2000. We see this as a potential warning of changes to come.
Fundamentals have been ignored for a long time now. We love fundamentals at Rockledge. We like investors (and investments) that pay more attention to earnings and revenue today! Despite this current distraction, away from fundamentals by the markets, our strategy aims to keep with the markets using a model that is rooted in fundamental research.
Happy New Year! The Rockledge Group.
DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
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Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.