Morningstar Advisor - August/September 2011 - (Page 63)

daily liquidity and reasonable fees. Billions have flowed into these funds over the past two years, and according to the Morningstar/ Barron’s annual alternative investment survey, managed-futures strategies are slated to be the biggest area of investment over the next five years. But what is the case for managed futures, and are these strategies worth all of the hype? Furthermore, how does one choose among the many managed-futures alternatives? Managed Futures, Deconstructed Exhibit 1 Rush of Futures: The industry has launched 19 managed-futures funds since June 2008. Name Inception Date Prospectus Net Expense Ratio Annual Ret 2008 USD Annual Ret 2009 USD Annual Ret 2010 USD Rydex|SGI Managed Futures Strategy A RYMTX ELEMENTS S&P CTI ETN LSC Direxion Commodity Trends Strat Inv DXCTX Direxion Financial Trends Strategy Inv DXFTX Incline Capital Trend Following A ICTAX Rydex|SGI L/S Commodities Strategy A RYLBX MutualHedge Frontier Legends A MHFAX AQR Managed Futures Strategy I AQMIX Arrow Managed Futures Trend A MFTFX Rydex|SGI Long Short Int Rate Strat A RYBSX American Indep Abs Ret Bull Bear Bd A AABBX Princeton Futures Strategy A PFFAX Natixis ASG Managed Futures Strategy A AMFAX Altegris Managed Futures Strategy A MFTAX Transamerica AQR Mgd Futures Strat I2 Forward Commodity L/S Strategy Instl FCMLX 03-02-07 06-10-08 06-10-08 03-02-09 03-30-09 06-25-09 12-31-09 01-06-10 04-29-10 06-30-10 07-07-10 07-08-10 07-30-10 08-26-10 09-30-10 01-03-11 01-05-11 03-04-11 03-22-11 04-27-11 1.97 0.75 1.75 1.77 2.63 1.93 1.99 1.25 1.57 1.52 1.31 2.20 1.72 2.00 1.22 1.81 0.95 1.95 2.20 0.65 8.53 –4.25 –10.45 –11.30 –3.84 –7.03 –0.71 –1.86 4.29 15.51 5.13 Managed-futures strategies take advantage of momentum, or price trends, across many different asset classes, using systematic, rules-based trading programs. If a particular futures contract exhibits a positive price trend, a managed-futures trading program will take a long position in that futures contract, anticipating a continued upward trajectory. Conversely, if a futures contract exhibits a negative price trend, the trading program will take a short position, expecting the price to decline further. Trading programs measure momentum differently. Several funds and ETFs that track the S&P Diversified Trends or Commodity Trends Indicator calculate momentum by comparing the current (front-month) futures contract’s price to its exponential seven-month moving average. Some active strategies incorporate multiple measures of momentum. They might pair a long-term measure (12 months or longer) with a short-term measure (three months or shorter). Some funds attempt to identify mean reversion, or the opposite of a price trend, as a way to make money when there are no price trends, or to protect against losses if the price trends reverse. Managed-futures funds also differ in their choices of underlying futures contracts. Most strategies limit trading to the most liquid contracts, but some funds choose to focus only on financial or commodity futures. Others attempt to diversify across many types of futures contracts, including equity indexes, government bonds, commodities, and currencies. WisdomTree Managed Futures WDTI Grant Park Managed Futures Strategy A GPFAX LoCorr Managed Futures Strategy A LFMAX JHVIT Strategic Allocation Trust Ser NAV Data as of May 31, 2011 Exhibit 2 Effects on a Portfolio: Adding managed futures can improve a portfolio’s risk-adjusted returns. Name Annlzd Return % 01-01-03 to 05-31-11 Std Dev 01-01-03 to 05-31-11 Sharpe Ratio 01-01-03 to 05-31-11 Traditional 60%/40%* Traditional With 5% S&P Dividend Trends Indicator** Traditional With 10% S&P Dividend Trends Indicator*** 6.80 6.79 6.77 9.14 8.38 7.63 0.54 0.58 0.63 * Calculated with 60% of the S&P 500 TR Index and 40% the Barclays US Aggregate Bond TR Index; rebalanced quarterly ** Calculated using 55% S&P 500 TR Index TR, 40% Barclays US Aggregate Bond TR Index, and 5% S&P Diversified Trends Indicator Index; rebalanced quarterly *** Calculated using 50% S&P 500 Index TR, 40% Barclays US Aggregate Bond Index, and 10% S&P 500 Diversified Trends Indicator Index; rebalanced quarterly MorningstarAdvisor.com 63 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011

Morningstar Advisor - August/September 2011
Contents
Contributors
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Small-Cap/Large-Cap Flip-Flop?
Four Picks for the Present
Investment Briefs
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?

Morningstar Advisor - August/September 2011