Monday, April 20, 2009
A reader passed along a link to a Hard Assets Investor interview with Mebane Faber that was mostly about his new book The Ivy Portfolio. I have a copy of the book but need to apologize for not having had time to read and review it.
There is one point in the interview that I wanted to explore and perhaps we can elicit a response from Mebane.
In response to a question about how to access the commodity space Mebane says "...and in commodities and currencies, we think long/short makes more sense than long/flat." He goes on to say "To access the space, we use the managed futures ETN [the ELEMENTS S&P CTI ETN (NYSE Arca: LSC)); Claymore is now putting out an ETF on the same index. We really like the managed futures product."
He says that in the book he talks about broad commodity index for commodities. In the chart I have LSC compared to the iPath Commodity ETN (DJP) and PowerShares Commodity ETF (DBC) for the life of LSC. I don't think anyone could have too much of a gripe about the performance of the fund but it does not look like a proxy for commodities to me.
If you look at a chart for Rydex Managed Futured (RYMFX), which is similar to LSC and has been around about 15 months longer, compared to DJP and DBC you will see that it too does not really look like a commodity proxy. I believe in what LSC does (I own RYMFX personally and for clients) but I would not expect a long short vehicle to fully capture the reflation trade or any other commodity effect. In fact since the March low, DBC is up 6%, DJP is up 8% and LSC is down 10%.
Mebane makes another point that I agree with about replicating hedge funds and private equity. He says that thus far the ETPs out there are imperfect although I would note that the Index IQ Hedge Fund ETF (QAI) is too new to render a verdict yet. And as I mentioned the other day Index IQ filed for a bunch of other hedge fund replication funds. If some of them deliver as hoped for then that would be an evolutionary step toward recreating the endowment portfolio for those so inclined.