Portfolio Manager Perspectives

Jeff Benjamin

F-Squared's Present staying fully invested

Quant manager zeroes in on historical stock prices and volatility to decide allocations across S&P's nine sectors

Jan 27, 2010 @ 12:45 pm

By Jeff Benjamin

ERROR: Macro getaudioplayer is missing!All signs point toward staying fully invested, according to Howard Present, co-manager of the Virtus AlphaSector Rotation Fund (PWBAX).

The $193 million fund, which relies on forward-looking quantitative analysis to determine allocations to the nine sectors making up the S&P 500, is looking like one of the hottest strategies around.

Sub-advised by F-Squared Investments Inc. to track the AlphaSector Rotation Index, the fund's assets have more than doubled over the past three months and net inflows are currently averaging $3 million a day.

“This strategy has allowed us to deliver a return profile that we think is very important to people,” said Mr. Present, president and chief executive of F-Squared, and co-manager of the fund.

He attributes much of the fund's recent appeal to downside protection, which comes from an ability to move out of the market if the near-term outlook for stocks in any or all underlying sectors is grim.

“All of our investment decisions are designed to avoid loss,” he said.

The protection paid off in 2008 when the strategy declined by just 8.5%, while the S&P finished the year down 37%.

Last year, when Mr. Present's analysis kept him out of the market until early April, the strategy gained 25.4%, while the S&P gained 26.5%.

The quantitative analysis concentrates on three primary inputs for each sector: historical price, volatility and changing levels of volatility.

The data is evaluated based on rolling averages, and those rolling average periods can vary from six months to more than two years, depending on the level of volatility in a given sector.

“Being able to shorten the rolling average windows is what makes us more responsive to the market conditions,” he said. “It allowed us to be more patient in times like 2005 and 2006, and it allowed us to get out of the market in 2008.”

The focus on sector volatility had the strategy carrying a 75% cash position in September 2008, with consumer staples representing the only allocation to equities.

A month later, when the stock market began its six-month free fall, the strategy was already 100% allocated to cash — an allocation it maintained until shortly after the market bottomed in March.

From the April 2001 start of the AlphaSector Rotation Index through the end of 2009, it has generated an annualized return of 6.7%. The annualized return for the S&P 500 was 1% over the same period.

And with that performance, the strategy has held the index's volatility to just 65% of the volatility of the S&P 500.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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