Our Process: From Research to Fund Selection

 

Observations:

  • Previously I discussed market observations of money flowing to this sector in the update:
  • I also mentioned how the trend of ‘Smart Money’ is buying relatively safe companies with good dividends given the uncertainty in the market:
  • As a Fund Investor, a dividend fund (which the model portfolios can buy) is not as effective in generating a few percent ROI as direct stock with good dividends. Therefore the conclusion is to only buy when a sector is low and with supporting fundamentals to hold that fund for potentially 3 years. One of those sectors identified this summer is Commodities with Metals such as Gold and Agriculture as a subset.

Specifically with Agriculture, this report outlines how we narrowed down choosing a specific fund to capture this market.

 

Part 1: Research

  • The Commodities sector has been beaten down the last few years and is LOW and TURNING AROUND.
  • First to rally were Gold then Silver then Oil, now it looks like AGRICULTURE such as corn etc. is starting to rise for the last 2 months.
  • Year-to-date Commodities are the best performers led by Precious Metals (Fig. 1).
  • Agriculture is to follow namely soft commodities which are all turning around:
    • Sugar (Fig. 2)
    • Soybeans (Fig. 3)
    • Coffee (Fig. 4)
    • Cotton (Fig. 5)
  • An ETF used to track this sector is DAG DB Agriculture Double Long ETN (Fig. 6).

These charts show this sector in a bear market for the last 5 years with no good opportunities, until NOW.

Fig. 1 - 2016 Precious Metals Top Performer YTD (Source: hk.morningstar.com)

Fig. 1 – 2016 Precious Metals Top Performer YTD (Source: hk.morningstar.com)

 

Fig. 2 - Sugar Price Action (Source: Stockcharts.com)

Fig. 2 – Sugar Price Chart (Source: Stockcharts.com)

 

Fig. 3 - Soybeans Price Action (Source: Stockcharts.com)

Fig. 3 – Soybeans Price Chart (Source: Stockcharts.com)

 

Fig. 4 - Coffee Price Action (Source: Stockcharts.com)

Fig. 4 – Coffee Price Chart (Source: Stockcharts.com)

 

Fig. 5 - Cotton Price Action (Source: Stockcharts.com)

Fig. 5 – Cotton Price Chart (Source: Stockcharts.com)

 

Fig. 6 - DAG ETF Price Action (Source: Stockcharts.com)

Fig. 6 – DAG ETF Price Chart (Source: Stockcharts.com)

 

 

Part 2: Funds Selection & Elimination

  • Like any sector that is identified as a potential opportunity after the research has been done, I’ve included the fund fact sheet, bloomberg ticker and Morningstar sector in the Members section.

This section teaches how to Find Equivalent Funds in the same category for different trading platforms worldwide.

  • The Morningstar category for Agriculture is: Equity – Sector Equity Agriculture.
  • A year to date ranking of this sector is shown and initially the funds identified are able to be traded with Model Beta’s fund selection along with a few other platforms (Fig. 7).
  • Although the 1-yr returns are negative the year-to-date returns look promising so far.
Fig. 7 - Ranking of Equity Agriculture Sector (Source: hk.morningstar.com June 30th)

Fig. 7 – Ranking of Equity Agriculture Sector (Source: hk.morningstar.com June 30th)

 

  • Having a look at this sector we must look inside each fund for the breakdown for the top 10 holdings and weightings. I went and selected the PORTFOLIO tab of each fund in morningstar.
  • CYCLICAL – We want this weighting to be larger as we believe its market cycle is turning around. We can see this sensitivity with the performance during the global financial crisis and other market events.
    • BASIC MATERIALS such as fertilizers (indicated by a basic-material) are much more volatile. Why? because as the price of commods go up, farming rate increases, and these basic materials/fertilizers go up exponentially. One such fertilizer is POTASH.
  • DEFENSIVE – We want this to be less as these holdings are too conservative and stable
    • CONSUMER DEFENSIVE or food-type holdings (indicated by a shopping cart icon shopping-cart-morningstar) are very defensive as they are a form of consumer staple and do not fluctuate much.

Because we do not buy and hold, but rather trade into the sectors, we are opportunists and look for the most volatile fund to potentially provide the most returns given the time the portfolio is invested in the sector.

  • Below I’ve displayed the shortlist of these funds along with their morningstar portfolio details:
    • Allianz Global Agricultural Trends AT (Fig. 8)
    • Amundi Equity Global Agriculture A2U-C (Fig. 9)
    • DWS Global Agribusiness A2 (Fig. 10)
    • Baring Global Agriculture A (Fig. 11)
    • First State Global Agribusiness Class I Acc (Fig. 12)
    • BlackRock World Agriculture A2 (Fig. 13)

 

Fig. 8 - Allianz Global Agricultural Trends Fund Components (Source: hk.morningstar.com)

Fig. 8 – Allianz Global Agricultural Trends AT Fund Components (Source: hk.morningstar.com)

 

Fig. 9 - Amundi Equity Global Agricultural Fund Components (Source: hk.morningstar.com)

Fig. 9 – Amundi Equity Global Agriculture A2U-C Fund Components (Source: hk.morningstar.com)

 

Fig. 10 - DWS Global Agricultural Fund Components (Source: hk.morningstar.com)

Fig. 10 – DWS Global Agribusiness A2 Fund Components (Source: hk.morningstar.com)

 

Fig. 11 - Baring Global Agricultural Fund Components (Source: hk.morningstar.com)

Fig. 11 – Baring Global Agricultural Fund Components (Source: hk.morningstar.com)

 

Fig. 12 - First State Global Agricultural Fund Components (Source: hk.morningstar.com)

Fig. 12 – First State Global Agribusiness Acc Fund Components (Source: hk.morningstar.com)

 

Fig. 13 - BlackRock World Agricultural Fund Components (Source: hk.morningstar.com)

Fig. 13 – BlackRock World Agricultural A2 Fund Components (Source: hk.morningstar.com)

 

Summary

  • Because we trade the portfolios, we are focused on the potential larger volatility certain elements can provide.
  • Therefore the funds with the largest percentage of Basic Materials are of interest to us.
  • Namely BlackRock World Agriculture & DWS Global Agribusiness A2.
  • Allianz Global Agricultural Trends is also available however its percentage of Basic Materials is too low.
  • The above info is summarized into the table below (Fig. 14).

BlackRock World Agriculture Fund is chosen as the best match and availability in Model Portfolio Beta’s Fund Choice.

 

Fig. 14 - Summary of Basic Materials % for shortlist as of Jul 18, 2016 (Source: hk.morningstar.com)

Fig. 14 – Summary of Basic Materials % for shortlist as of Jul 18, 2016 (Source: hk.morningstar.com)

 

 

Part 3: BlackRock World Agriculture Fund & The Potash Play

  • Now that we’ve focussed on using BlackRock World Agriculture Fund to capture this sector, another key element that is a major factor is the cycle of POTASH that comes into play.
  • Potash is a potassium-based product that is often bonded to other chemicals. It is predominantly used as a fertilizer to encourage water retention in plants, increase yields, improve taste and help plants resist disease. (Source: Investing.com)
  • Potash itself (vs. Phosphate) has a very explosive cycle and used to accelerate agriculture farming.
  • It’s characteristics are apparent and can potentially go from US$200/t to over US$800/t (Fig. 15).
FIg. 15 - Potash Historical Price Movement (Source: Infomine.com)

FIg. 15 – Potash Historical Price Movement (Source: Infomine.com)

 

Focus on Funds that hold Stocks related to Potash as well as agrochemical, agribusiness, and agriculture biotechnology.

The key holdings of BlackRock World Agriculture Fund has these Basic Materials and the most significant accelerator is forecasted to be those related to Potash. Potash Corp of Saskatchewan current trading around $20 near its previous low.

  • Monsanto Co. (Fig. 16)
  • Syngenta Ag (Fig. 17)
  • Potash Corp of Saskatchewan (Fig. 18)
  • BlackRock World Agriculture Fund A2 Chart (Fig. 19)

 

Fig. 18 - Monsanto Co Chart (Source: Stockcharts.com)

Fig. 16 – Monsanto Co Chart (Source: Stockcharts.com Sept 20, 2016)

 

Fig. 17 - Syngenta AG Chart (Source: Stockcharts.com)

Fig. 17 – Syngenta AG Chart (Source: Stockcharts.com Sep 20, 2016)

 

Fig. 18 - Potash Co Chart (Source: Stockcharts.com)

Fig. 18 – Potash Co Chart (Source: Stockcharts.com July 13, 2016)

 

Fig. 19 - BlackRock World Agriculture A2 Fund (Source: hk.morningstar.com July 18, 2016)

Fig. 19 – BlackRock World Agriculture A2 Fund (Source: hk.morningstar.com July 18, 2016)

 

Conclusion

Essentially this report has shown the process of how we research a sector and zero in on the funds available on Morningstar, then specific to our platform on Model Portfolio Beta.  We further evaluated the portfolio components to ascertain the volatile characteristics of basic materials namely Potash.

As with all sectors the aim is to have proper risk management and not expose more than 20-25%. Regular contributions have began on June 29, 2016 (Switching Update), with further rebalancing is to come as the sector moves in our favor.

This now becomes a cyclical play on Potash and we will continue to monitor all related holdings and fund price movement.

 

Best,
Michael

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