Commodity Turns

With commodities in focus (having moved to the number 2 spot of DALI in the past week), we wanted to draw your attention to some interesting research published by Arrow Funds.

DALI

Source: Dorsey Wright, as of 6/23/16

From their piece Commodity Turns:

The table below illustrates the 10-year, 5-year, and 3-year annualized returns for eight major asset classes through December 31, 2015.  The table also shows the average rolling annualized returns and the worst single rolling time periods from January 1970 through December 2015.

Commodities had a 10-year annualized return of -10.56% as of 12/31/2015, which also happens to be the worst 10-year rolling period since 1970.  But since 1970, commodities have actually averaged 8.38% across all rolling 10-year periods—a difference of 18.94% between the recent 10-year return and the rolling 10-year average.  For those who subscribe to the idea of “reversion to the mean” where extreme returns revert back to the average, a case could be made for commodities to turn in a more favorable direction.

reversion the mean

Like many asset classes, commodity returns go through periods of ups and downs.  Sometimes they have been the best performing asset class, sometimes the worst, and often somewhere in between.  With declining oil prices, a drop in precious metals and slowing global growth, commodities have been out of favor with investors for several years.  Due to the historically low correlation and potential diversification benefits, many investors are eager for commodities to make an upward turn.

The table below illustrates the calendar year performance for each of the eight asset classes and the relative rankings of commodities.  Commodities had back-to-back double digit negative returns and finished in the last place for the calendar years 2014 and 2015.  Since 1970, that has only happened two other times, in 1975-76 and 1997-98, as highlighted in yellow.  The table also illustrates the calendar year performance for 1977 and 1999, which are the years immediately following the back-to-back last place finishes (highlighted in green).

asset class history

The outcome for 2016 and beyond still remains to be seen and past performance is never indicative of future returns.  But history does shown that commodities have had the ability to reverse from sustained lows and deliver significant gains.  After back-to-back last place rankings, the single year returns that followed in 1977 and 1999 for commodities were impressive.  Perhaps even more interesting for investors with a longer time horizon are the average returns for the following three year periods 1977-1979 and 1999-2001, as illustrated in the table below.

3 year commodity

Click here for disclosures.

Two potential solutions for investors who are looking for commodity exposure are The Arrow DWA Balanced Fund (DWAFX) and the Arrow DWA Tactical Fund (DWTFX and DWAT).  Both of these strategies have the ability to allocate to commodities when they are in favor (and both have the ability to rotate away from commodities when they are out of favor.

As shown below, The Arrow DWA Balanced Fund (DWAFX) has the ability to allocate between 10 and 40 percent to Alternatives, including commodities.

dwafx

The Arrow DWA Tactical Fund (DWTFX and DWAT), has the ability to allocate between 0 and 90 percent to Alternatives.  Commodities can be up to 30 percent of that allocation.

dwtfx

Environments where commodities are in favor have the potential to be good environments for the performance of these strategies.  We have seen our commodity exposure in both of these funds increase in recent months.  Click here and here to see the 5/31/16 holdings of these funds.

The Arrow DWA Balanced Fund (DWAFX) is available as a mutual fund — click here for more information.

The Arrow DWA Tactical Fund (DWTFX) is available as a mutual fund and as an ETF (DWAT).  It is also available as the Global Macro portfolio on a number of SMA and UMA platforms, including the Wells Fargo Masters and DMA platforms. —click here for more information.  Contact Andy Hyer at andyh@dorseymm.com for information about the SMA/UMA.

See www.arrowfunds.com for a prospectus.  Dorsey Wright is research provider to Arrow Funds for The Arrow DWA Balanced and Arrow DWA Tactical Funds.  The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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