Monday, October 4, 2010

A Great Third Quarter

It was a great third quarter and I’m happy that we will soon be reporting some excellent numbers. Many of our clients tend to view their results in the context of their monthly statements, however, the quarter offers a different, longer-term (but not long term) view of the world. I thought I would offer a few comments about the markets in general and Pinnacle portfolio performance in particular…much to the chagrin of the rest of the investment team who would prefer that I keep my mouth shut until we get our “official” GIPS compliant numbers. As our client’s know, they will soon be receiving our Quarterly Market Review. It is a beautifully written piece by Rick, Carl, and Sean offering clear, concise commentary and statistics about the past three months. I offer none of the above here but that is, of course, the great thing about writing a blog.

The past three months saw the broad stock market get whipsawed every month in terms of performance. July was a record breaker in terms of +7% performance, August was a record breaker in delivering a negative 5%, and now September with a more eye-catching +9%. For investors executing trend following systems the quarter was probably a nightmare. I show the S&P 500 gaining more than 11% for the quarter, bonds earning more than 2%, developed country international stocks +16% on a significantly weaker dollar, and gold gaining more than 9% for the period. Interestingly, only gold actually set a new high during the quarter as both U.S. and International stocks finished the quarter below the highs they made this past April. I’m guessing (here’s where Sean is going to get mad at me) that Pinnacle Conservative Growth investors gained 5% - 6%, Moderate Growth investors earned about 7% and Dynamic Appreciation investors gained about 8%. I didn’t check the DC and DUA strategies this morning…the Ravens-Pittsburg game is coming on soon and time is of the essence. My point is that there was some serious wealth creation delivered to Pinnacle clients over the past three months, and that’s good news. Investors who chose to remain in cash waiting for the world to end during this past quarter just got slaughtered.

On a relative performance basis the news may actually be a lot better than I thought it would be. I’m guessing that we delivered very close to benchmark performance for our DMG investors and only trailed by 100 basis points (give or take) in our DCG and DA models. I’m also guessing the relative performance might be worse for our most aggressive clients considering the monster rally that occurred and the relatively conservative stance in our managed accounts. In fact, I would say that if my guestimates are anywhere near accurate we dodged a bullet during the period in terms of relative performance. It’s easy to see, in hindsight, that our conservative stance was unwarranted during the period, yet I think our performance held up quite nicely. I have often written in this space about the problems with managing risk when you own a diversified portfolio of asset classes where correlation can move all over the place. We had several days in August where our downside market capture (beta) was only 20% - 30% of the broad market in our moderate portfolio strategy. To finish the quarter gathering 60% or more of the markets upside feels like a major victory. As you will read in our Third Quarter Commentary, the game “is still afoot.” Stay tuned…