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BCM Small Cap Sector Rotation SPDJ Webinar – July 15 th , 2014 A Clear View of Quantitative Investing
BCM Small Cap Sector Rotation SPDJ Webinar – July 15th, 2014
A Clear View of Quantitative Investing
Meet the Investment Team
• Dave Haviland, Portfolio
Manager & Managing Partner
• Todd Rice, Co-Director of
Research*
• Gordon Bennett, CFA, Co-
Director of Research*
2 *Currently members of a joint venture organization. We anticipate their employment beginning in 2014.
For Investment Professional Use Only
Investors Are Not Risk Averse, They’re Loss Averse
3
• Volatility is an incomplete measure of risk to an investor. Standard
deviation includes:
− upside risk, which investors want
− downside risk, which investors fear
• Investors often define risk as the possibility that they will lose
money
• Behavioral finance research finds that investors weigh losses two to
six times more heavily than gains
For Investment Professional Use Only
Please refer to the disclosure page for additional information.
Building Wealth by Preserving Capital
• The mathematical reality of returns supports investors’ view of risk
− Every loss requires an outsized gain just to break even.
− Large losses can devastate a portfolio.
• Every asset class goes through periods of market failure.
• Sector Rotation strategies can provide upside participation while minimizing large losses.
4
% Loss
% Gain
needed to
get back to
even
-10%
-20%
-30%
-40%
-50%
-60%
11%
25%
43%
67%
100%
150%
Loss/Gain
For Investment Professional Use Only
Please refer to the disclosure page for additional information.
Why Sector Rotation?
5
For Investment Professional Use Only
• Economies move through different business cycles
− Stock markets are typically a leading indicator of the business cycle
− Different sectors outperform during different phases of the cycle
• Despite consistent trends, cycles vary in duration and are effected
by short term market “noise”
− Challenge is knowing when a change will occur / is occurring
− A key to success is to evaluate the market condition of each sector based
primarily on momentum to invest accordingly
Please refer to the disclosure page for additional information.
Sector Performance
Throughout Business Cycles
6
For Investment Professional Use Only
Early Cycle Mid Cycle Mature Cycle Recession
Overall Equity Market Avg. 24% 15% 9% -14%
Economically Sensitive Consumer Discretionary 36% 14% 4% -16%
Materials 29% 11% 18% -15%
Industrials 29% 16% 9% -20%
Technology 29% 20% 5% -20%
Financials 28% 15% 10% -16%
Consumer Staples 22% 13% 14% -1%
Health Care 20% 16% 16% -7%
Energy 17% 17% 23% -14%
Economically Insensitive Utilities 13% 11% 14% -3%
Maximum Delta 23% 9% 19% 19%
Includes equity market returns from 1962 through 2010. Returns are represented by the top 3000 U.S. stocks ranked by market capitalization.
Sectors as defined by GICS. Source: Fidelity Investments (AART) as of Apr. 30, 2012. Past performance is no guarantee of future results. Early Cycle:
Above average acceleration in economic activity. Macroeconomic variables rebound from previous contractionary phase; Mid Cycle: Rate of growth
in economy is positive but not increasing at the rate of the previous Early-Cycle phase. Overall growth is peaking and economy is generally healthy;
Mature Cycle: Growth remains positive but is slowing, inflationary pressures begin to build; Recession: Contraction in economic activity, profits
decline and credit is not readily available. Please refer to the disclosure page for additional information.
Why Small Cap Sector Rotation?
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For Investment Professional Use Only
Price return and standard deviation information is from 12/31/94 to 6/30/14. Returns quoted are compounded returns for the period
of the S&P Small Cap 600 and the S&P 500 respectively. Past performance is no guarantee of future results. An investment cannot be
made directly in an index. Please refer to the disclosure page for additional information.
• Small Cap Tendencies
− Greater Economic sensitivity
− Faster reaction to changing economic circumstances
− Outperformed large cap based on the price return 625% to 327%
− Greater volatility with annualized standard deviation of 2.67% higher
• This creates opportunity!
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Growth of Small Cap vs. Large Cap
For Investment Professional Use Only
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Growth of S&P Small Cap 600® Index vs. S&P 500® Index
Based on price returns
Growth S&P 600
Growth S&P 500
Price return and standard deviation information is from 12/31/94 to 6/30/14. Returns quoted are compounded returns for the period
of the S&P Small Cap 600 and the S&P 500 respectively. Past performance is no guarantee of future results. An investment cannot be
made directly in an index. Please refer to the disclosure page for additional information.
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Correlations of Small Cap vs. Large Cap
For Investment Professional Use Only
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Rolling 30 Day Correlation over time of S&P Small Cap 600 vs. S&P 500
Total Standard
Deviation Total
Correlation S&P 500 19.49%
0.874 S&P Small Cap 600 22.16%
Price return and standard deviation information are from 12/31/94 to 6/30/14. Returns quoted are compounded returns for the
period of the S&P Small Cap 600 and the S&P 500 respectively. Past performance is no guarantee of future results. An investment
cannot be made directly in an index. Please refer to the disclosure page for additional information.
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Sector Differences within S&P Small Cap 600
For Investment Professional Use Only
Rolling 30 day
Correlation Rolling 252 Trading Day Return
Avg. Standard
Deviation
High Low Average High Avg. S&P Small
Cap 600 Average Low (between sectors)
0.96 0.61 41.28% 11.84% -8.24% 14.68%
Average standard deviation between the sectors is the average standard deviation on a day to day basis for the rolling 252 day
returns of each sector. Price return and standard deviation information are from 12/31/94 to 6/30/14. Returns quoted are
compounded returns for the period of the S&P Small Cap 600 and the S&P 500 respectively. Past performance is no guarantee of
future results. An investment cannot be made directly in an index. Please refer to the disclosure page for additional information.
-75%
-50%
-25%
0%
25%
50%
75%
100%
125%
150%
175%
Rolling 252 Trading Day Returns
Highest performing Small Cap Sector
S&P Small Cap 600
Lowest performing Small Cap Sector
Small Cap Sector Rotation with a Disciplined Tactical Approach
• Tactical, momentum based
strategy applied to U.S. small cap
• Only holds sectors with positive
momentum, with the ability to go
entirely to cash or equivalents
• Invests exclusively in long-only
ETFs: No active use of margin,
leverage, shorting or inverse.
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Technology
Industrials
Consumer
Discretionary
Consumer
Staples
Energy
Healthcare
Materials
Financials Utilities
Small Cap Sector Rotation
Investment Universe*
*Telecommunications sector is included in Utilities.
For Investment Professional Use Only
Please refer to the disclosure page for additional information.
The Sector Investment Process*
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Consumer Discretionary
Consumer Staples
Energy
Healthcare
Industrials
Materials
Technology
Utilities Financials
Weekly Quantitative Analysis
Primary inputs:
• Price trend and momentum
• Volatility of each market sector
• Rate of change in each sector’s volatility
• Volume of trading
Sector
ETFs
If positive
momentum
Own (in equal
weights)+
Don’t
Own
Reallocate to
positive sectors
or cash (or
equivalents)
*This process is executed on a weekly basis to determine which sectors will be included or excluded in the appropriate strategies
+ No ETF purchase will exceed 25% of the strategy. If 3 or less sectors are being used, the strategy will reallocate to cash or equivalents.
Please refer to the disclosure page for additional information.
For Investment Professional Use Only
If negative
momentum
Entering a Bear Market
Cash or Cash Equivalents
100%
(Cash)
100%
(Cash)
SIGNALS SIGNALS CHANGE
All sectors Positive
SIGNALS CHANGE SIGNALS CHANGE
Financials, Consumer
Discretionary, Technology
Turn Negative
Industrials, Materials,
Energy, turn negative +
Cash Equivalents
All sectors negative.
Portfolio moves to 100%
Cash Equivalents
SIGNALS SIGNALS CHANGE SIGNALS CHANGE SIGNALS CHANGE
All sectors negative.
Portfolio is 100% Cash
Equivalents
Industrials, Materials,
Energy turn positive
Financials, Consumer
Discretionary, Technology turn
positive - Cash eliminated
All sectors Positive
11.1%
11.1%
11.1%
11.1% 11.1%
11.1%
11.1%
11.1%
11.1%
11.1%
11.1%
11.1%
11.1% 11.1%
11.1%
11.1%
11.1%
11.1%
Utilities Consumer
Discretionary
Consumer
Staples Energy Industrials Materials Technology Financials Healthcare
16.6
%
16.6
%
16.6
%
16.6
%
16.6
%
16.6
% 25.0
%
25.0
%
25.0
%
25.0%
(Cash)
25.0
%
25.0
%
25.0
%
25.0%
(Cash)
16.6
%
16.6
%
16.6
%
16.6
%
16.6
%
16.6
%
An example of Sector Rotation in Action – Allocate as the Market Dictates
Entering a Bull Market
The example above shows the progression of how the signals may change from one trading period to the next. The actual percentages
will not equal 100% as each strategy will typically maintain a small cash position (~2%). This example is for illustrative purposes only.
Refer to the disclosure page for additional, important information.
For Investment Professional Use Only
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Small Cap Recap
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For Investment Professional Use Only
• Sector Rotation can add value by taking advantage of the
economic and stock market cycles
• Small Cap equities present even greater opportunities to exploit
these cycles
• A rules-based, momentum process adds discipline and focus to
adjust for the vagaries of market cycles and short-term market
“noise”
Please refer to the disclosure page for additional information.
Disclosures Copyright © 2014 Beaumont Financial Partners, LLC. All rights reserved.
Securities of companies with smaller market capitalizations tend to be more volatile and less liquid than larger company stocks. Smaller companies may have no
or relatively short operating histories or be newly public companies. Some of these companies have aggressive capital structures, including high debt levels, or
are involved in rapidly growing or changing industries and/or new technologies, which pose additional risks. Investing a substantial portion of a Fund’s assets in
related industries or sectors may have greater risks because companies in these sectors may share common characteristics and may react similarly to market
developments.
As with all investments, there are associated inherent risks. Stock markets, especially foreign markets, are volatile and can decline significantly in response to
adverse issuer, political, regulatory, market, or economic developments. Sector investments concentrate in a particular industry and the investments’
performance could depend heavily on the performance of that industry and be more volatile than the performance of less concentrated investment options and
the market as a whole. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging
markets. The risks are particularly significant for ETFs that focus on a single country or region. The ETF may have additional volatility because it may be
comprised significantly of assets in securities of a small number of individual issuers.
ETFs are not actively managed, trade like stocks and are subject to investment volatility and the potential for loss. The principal amounts invested in ETFs are not
protected, guaranteed or insured. An Exchange Traded Fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but
trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
The sample allocations shown are for example purposes only. BCM maintains discretion over all of its strategies. Actual allocations may grow much larger if no
sell signal is generated. Money market levels are estimated to be, at a minimum, 2% even when a model is “fully” invested. Due to the periodic rebalancing
nature of this strategy it may not be appropriate for those investors who need or desire monthly or quarterly withdrawals or wish to make periodic deposits.
The Standard & Poor's (S&P) 500® Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are not
managed and do not incur fees or expenses. The Standard & Poor's (S&P) Small Cap 600® Index is an unmanaged index that tracks the performance of 600
widely held, small-capitalization U.S. stocks. Indices are not managed and do not incur fees or expenses. Indices are not managed and do not incur fees or
expenses. Indices are not managed and do not incur fees or expenses. “S&P 500®” and “S&P Small Cap 600®” are the registered mark of Standard & Poor’s
Financial Services, LLC, a part of McGraw Hill Financial, Inc.
Beaumont Financial Partners, LLC- DBA Beaumont Capital Management, 20 Walnut Street, Wellesley Hills, MA 02841 (888) 777-0535
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For Investment Professional Use Only
