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Hear it From the Experts - Advisor Interview with Gabriel Pincus of GA Pincus Funds

Gabriel Pincus of GA Pincus Funds, and investor in the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) speaks with Will Rhind, Founder and CEO of GraniteShares ETFs, to answer some questions about his strategies and use of ETFs.

WR: Thank you for taking some time to visit us in New York. To start off, tell us about you and your background.

GP: With some help from my Bubbe (Yiddish word for grandma) my love for the stock market began at age 10 when she bought me three shares of Dell.

After studying entrepreneurship in college at Indiana University,I became an agency trader at Bear Stearns. In this capacity, I executed orders on behalf of hedge funds and wealthy individuals and began to understand that a disciplined strategy was needed to outsmart the market.

In 2007, I moved to wealth management where I discovered that the disciplined strategies utilized by traders were missing in this space. I spent the next 5 years submerged in the Exchange Traded Fund (ETF) industry while working for IHS Markit and Deloitte & Touche.

After completing an MBA in Finance at Vanderbilt University in 2014, I started focusing on what would eventually become GA Pincus Funds.

WR: Tell us about GA Pincus funds.

GP: GA Pincus Funds is a Texas, New York, & Illinois Registered Investment Adviser (RIA) that creates Separately Managed Accounts (SMAs) for clients using an investment strategy comprised of three main tenets: Active Management, Low Cost, Transparency.

GA Pincus Funds utilizes a proprietary algorithm to Actively Manage all accounts; investing in Low Cost Exchange Traded Funds; while allowing all investors Transparent 24/7 real-time access to their accounts. We manage money for clients in 9 states and the District of Columbia.

WR: Can you explain your investment approach?

GP: Each client receives a customized risk profile based on factors such as: investment goals, age, time horizon, employment status, etc. GA Pincus Funds uses this risk profile to develop a long-only allocation of ETFs.

We then use a proprietary algorithm to monitor each client’s account ensuring that all securities trade within a predefined range. Trades are triggered when individual securities move outside this range. The algorithm includes a tax loss harvesting feature that seeks to minimize or even eradicate short term gains in taxable accounts.

Each of our clients has a unique benchmark based on that client’s risk profile.

WR: You talk about being a FinTech firm, can you explain more?

GP: FinTech involves the mixing of finance and technology to disrupt an existing way of doing business. Our proprietary algorithm is built into our proprietary software which is linked to TD Ameritrade. Once a client deposits money at TD Ameritrade, we use our software to create the client’s unique allocation and algorithmically manage that client’s investment based on real-time market movements. As we continue to enhance our software our goal is to eventually license it to competing RIAs.

WR: How do you build models, what is your approach to asset allocation?

GP: We believe that value can be achieved through extreme diversification. Each client should have a small portion of their wealth spread throughout as many assets classes as possible. The exact number of asset classes will be determined by the size of the investment and the risk profile of the investor. Currently, the investible universe at GA Pincus Funds is comprised of 30 asset classes and 100 ETFs – 56 of which offer commission-free trading.1

Our portfolios are long-only and we do not invest in Exchange Traded Notes or ETFs that issue a K-1. We typically design our allocations such that clients with less than $100,000 hold portfolios exclusively comprised of free-trading ETFs.1 This keeps annual ETF management fees down to approximately 0.15% and commissions down to 0.00%. Larger accounts will have annual ETF management fees below 0.20% and trading fees below 0.05%.

Keeping our costs low is an essential tactic in striving to improve our client’s performance.

WR: What do you view as the role of commodities in a portfolio?

GP: Our algorithm is driven by volatility and the correlation between assets classes. Commodities, which are both volatile and inversely correlated to most asset classes, play an integral role in our client’s portfolios. Depending on the client’s account size and risk profile, we will allocate anywhere from 0-10% of a portfolio to commodities.  

WR: What do you see as the future of investment management / investment advice / both?

GP: Investment management will get more automated. More and more companies like GA Pincus Funds will emerge that use mathematics and statistics to manage wealth in a more efficient manner. The analysis that is performed before investment advice is given may be automated, but at least for the foreseeable future, the actual delivery of that advice will continue to be done by a human.  

WR: What sets your firm apart from others?

GP: GA Pincus Funds is proud to offer our services to clients from all walks of life. While you do not need to be a multi-millionaire or c-suite executive to invest ($25k minimum), our larger accounts seek to offer increased diversification.

WR: What challenges are investors and advisors facing right now?

GP: There are currently a few challenges facing the investment industry. Investors are paying too much and receiving too little. Some wealth managers pay separate money managers to invest client assets in specific strategies. While buy and hold is typically low cost, it is inefficient and generally has not beat the market.

Money managers at times do beat the market, but when their fees are added to the fees of the wealth manager, those fees may reduce alpha.

Advisors are finally beginning to jump on the ETF bandwagon in large numbers, but what many fail to understand is that not all ETFs were created equally. Many advisors use ETNs without understanding that if the issuing bank goes bankrupt the value of the ETN will go to zero. Others invest their clients in volatility or leveraged products without knowing that these products were essentially created for very short-term hedges, not as part of a buy and hold strategy.

Investors, should demand more from advisors. If you are paying someone a fee and you are underperforming your benchmark, you should seek better performance or a lower fee. Further, you should demand that your advisor explain to you what each holding in your portfolio is and why it is there.

WR: Tell us about your routines or habits.

GP: As a trader, I saw all the guys eating sunflower seeds and I definitely picked up on that habit. I spend about an hour a day working on my software with my excellent developer, Tim Roesch, who is based in Dayton, Ohio.

When I am in the office, I monitor the software in conjunction with my original Excel spreadsheets to double-check the functionality. I spend multiple hours a day reading news, financial and otherwise, and use that information to come to my own conclusions about why the market is where it is.

I fill the remainder of my time seeking out new clients and helping my existing clients with any questions they may have.

WR: What time do you get up / do you have any morning routines you can share?

GP: The last thing I do before bed is check the Asian markets on CNBC. This helps me prepare for my day ahead. I have an alarm, but I always rise before it goes off. I wake up each morning at 7:20am jump out of bed, shower, brush my teeth, and walk my dog, Pierre. My office is in my home, so I get there by 7:45am. 

WR: What do you believe is the secret to success?

GP: Find something you love and then try to be the best at it that you can be. My passion as much as my performance is what has helped GA Pincus Funds succeed. While still a small company, we have grown from 1 client to 35 clients in under 2 years. If you ask my wife, who has supported me and my business unconditionally, she will say, I am a better person for having launched this business.

WR: Anything else you’d like to cover?

Until recently GA Pincus Funds had been using a precious metals ETF and a MLP ETF for our client’s commodity exposure.

This wasn’t perfect, but it is difficult to find commodity ETFs that don’t issue K-1s. COMB, the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB), fills a void. It is a commodity ETF that provides exposure to 20 different commodities while limiting the total exposure to any individual commodity to 25%.

As the name suggests, the ETF does not issue a K-1 and its management fee is lower* than its competitors. While trading has been light, the market makers are extremely effective, there has been ample liquidity, and the typical bid-ask spread was less than 0.03 (source: Bloomberg, 9/2017). By switching to COMB I provided my clients with a broader commodity ETF and lowered their annual ETF management fees by 6-14%.2

WR: Thanks for your time, Gabriel, and the great insight into your business and use of COMB!

 

*ETF.com Oct 2017

1.      Additional Fees may include but are not limited to: 1.00% of AUM paid quarterly (0.25%/quarter) in arrears. ETF management fees (0.05% - 0.50%) per year depending on the ETF. Trading Fees ($6.95/trade) where applicable. 56 ETFs do not charge the $6.95/trade commission, 44 ETFs do charge the $6.95/trade commission.  

2.      Fee calculation example: Client: #00013. Original Holdings: $325,000; Commodities 10% (5% MLPX and 5% GLTR) Non-Commodity Holdings (90%) = The fee for these holdings totals $462.86 MLPX Annual Fee: 0.45% * $325,000 * 5.00% = $73.125 GLTR Annual Fee: 0.60% * $325,000 * 5.00% = $97.50 Total Fee (original) = $462.86 + $73.125 + $97.50 = $633.485 New Holdings: $325,000; Commodities 10% (10% COMB) Non-Commodity Holdings (90%) = The fee for these holdings totals $462.86 COMB Annual Fee: 0.25% * $325,000 * 10.00% = $80.29 Total Fee (original) = $462.86 + $80.29 = $543.15 $ Difference between old and new holdings = $633.485 - $543.15 = $90.335 % Difference between old and new holdings = $90.335 / $633.485 = 14.26%.

Insights

Commodities: Why Now? An Investment Case

Commodities: Why Now? An Investment Case

Executive Summary

Commodities fuel the world's economy. Raw materials like copper or crude oil are essential for industrial processes in all sectors of all markets, from Buffalo to Beijing. As such, commodities offer a unique opportunity to invest in economic growth at its most elemental level.

After the commodities bubble burst in 2012, however, many investors exited their commodities positions, either in part or in total. Still others shied from the asset class altogether.

But the investment benefits of commodities haven't changed. Commodities can serve as a powerful tool in the investor's toolbox, offering the means not only to diversify portfolios and potentially lower overall risk, but may also help to stave off the wealth-eroding impact of inflation.

In this paper, we explore the investment case for commodities as an asset class, including:

  • Why cyclicality in the commodities markets matters to investors
  • Why signs point to now as an ideal re-entry point to the asset class
  • The two roles commodities should serve in every investor's portfolio

Putting Commodities in Context

With Commodities, History Repeats Itself

The commodities market is famously cyclical, characterized by protracted bull and bear markets that are intimately tied to global industry. As economic growth picks up, commodity stockpiles tend to decrease, boosting prices. These shortfalls rev producers into higher gear, which adds to supply and depresses prices once more. That in turn encourages more industrial growth. And so the process repeats over multi-year periods, a tug-of-war that underpins the entirety of the commodities market.

The mid-2000s, however, saw a rally of extraordinary proportion. Buoyed by demand from emerging markets—primarily China and India—commodities prices roughly tripled between 2000 and 2011. Crude oil, copper, steel, and aluminum all struck record highs.

Then, in 2012, the bubble burst, due to two main factors:

  • China began scaling back its manufacturing sector and restructuring toward a service-based economy, decelerating growth. The country's demand for all kinds of raw materials fell.
  • The US shale oil industry came of age, flooding the market with cheap alternatives to Middle Eastern crude oil. This led to chronic oversupply in the energy markets, as traditional oil producers were slow to reduce their output.

The one-two punch of slowing Chinese demand and the crude oil glut depressed prices across the commodities market. Even grains and other foodstuffs suffered, as investors fled the asset class just in time for better-than-expected crop yields to exacerbate oversupply.

Ever since, commodities performance has languished. But in these markets, one thing is certain: What goes up must come down – and back up again.

Why Commodities Now?

Several favorable supply/demand fundamentals suggest that commodities may be on the verge of their next big bull market phase:

  • An increasing consumer base Each year, the global population rises by 1.11% 1 , and thus, 80 million new commodity consumers enter the market. These consumers will need not just foodstuffs, but also energy sources and industrial metals to power the goods, appliances and devices essential to life in the 21st century.
  • The urgent need for infrastructure Even as emerging markets like China undertake a massive build-out of new infrastructure, developed markets are in dire need of infrastructure repairs, replacements and upgrades. Both kinds of construction will require plenty of raw materials, especially metals and fuel.
  • Rebounding world growth Currently, the Organisation for Economic Co-operation and Development (OECD) projects that over the next two years, the global economy will grow its fastest pace in six years, rising from 3.1% in 2016 to 3.5% in 2017 and 3.6% in 2018. As the global industrial engine picks up, then so too should its expected demand for commodities.

Understanding the Role of Commodities in a Portfolio

All else held equal, investors generally prefer asset classes offering higher, not lower, expected return. Though commodities' recent performance has been underwhelming, history shows that over long time periods, the asset class has generated significant returns for investors.* Research by Yale economists 2 found that over a 60-year period, commodities returns vastly outpaced those of bonds and even remained on par with equities, but with less expected volatility.

Because of the cyclicality of commodity markets, however, it's important to think of this asset class in terms that go beyond expected return. For investors, especially for those with long time horizons, commodities serve two important portfolio functions:

  • As a potential hedge against inflation
  • As a diversifier to other assets, such as equities or bonds

We examine each of these roles in turn.

Commodities as an Inflation Hedge

Inflation is one of the biggest threats to long-term accumulation of wealth. It dilutes the real value of money, especially over long periods of time, ensuring that each dollar spent buys less than the one before it. Worse yet, inflation is hard for investors to predict or even plan for.

Historically, commodities have provided a powerful hedge against inflation, as the two are co-linked to economic cycle 3 . As the economy expands and generates inflation, demand for raw materials also rises, which in turn pushes commodities prices higher.

*Past performance does not guarantee future results

When inflation increases, so too do commodities prices; though the correlation is not perfect, it has held true over many time periods. As Table 1 reveals, commodities were one of the few asset classes that worked as an effective inflation hedge in both the 1990s and 2000s:

Table 1: Asset Class Correlations to the CPI in 1990s and 2000s

Asset Class Correlation to CPI – 1990s Correlation to CPI – 2000s
Commodities 0.15 0.35
Gold 0.14 0.05
U.S. Equities -0.31 0.05
International Equities -0.21 0.07
Emerging Market Equity -0.04 0.08
U.S. Bonds -0.06 -0.20

Source: Bloomberg, Monthly correlation from Dec. 31, 1989 to Dec. 31, 1999; and from Dec. 31, 1999 to Dec. 31, 2009. Data series used include commodities: S&P GSCI Index, U.S. equities: S&P 500 Index; U.S. bonds: Bloomberg Barclays US Aggregate Index; International equity: MSCI EAFE Index; Emerging market equities: MSCI Emerging Market Index; Gold: Spot Index

This relationship holds true even today. Over the past 15 years, commodities have exhibited a positive correlation to inflation that far exceeds that of any other asset class, even gold (see Table 2):

Table 2: Asset Class Correlation to the CPI, 2002-2017

Commodities U.S. Equities International Equities U.S. Bonds International Bonds Real Estate Gold
0.41 0.06 0.10 -0.03 -0.23 0.06 0.06

Source: Bloomberg. Monthly correlations from 6/30/02-6/30/17. Data series are same as above, except in the following cases: International equities: MSCI ACWI Ex-US Index; International bonds: Bloomberg Barclays Global Aggregate Index; Real estate: DJ US Real Estate Index

Though in recent years inflation has remained anemic, it appears to be revving back up again. In the U.S., the CPI struck a five-year high in February 2017, rising 2.7% over the 12 months prior. Looking more broadly, the OECD recently found that in January 2017, the annual inflation rate in developed markets had jumped to 2.3%, or its highest rate in roughly 5 years.

As expected, commodity prices have also begun to creep higher. Crude oil prices have rebounded from sub-$30/barrel to roughly $50/barrel in 2017, based on emerging market demand growth, reduced Middle East production, and lower global stockpiles. Food prices are also on the rise, with grains and softs inching higher from their multi-year lows.

The next inflationary period is not a matter of if, but when. Commodities may help investors make sure their portfolios weather the storm.

Commodities as Portfolio Diversifiers

Correlations 4 are the secret sauce of a well-diversified portfolio. By combining assets with low correlations to one another, investors may lower their portfolio's expected volatility without negatively impacting returns. Over the fifteen year period ending June 2017, commodities exhibited low correlations to other asset classes, such as stocks and bonds (see Table 3):

Table 3: Commodity Correlations to Other Asset Classes, 2002-2017

U.S. Equities International Equities U.S. Bonds International Bonds Real Estate Gold
0.33 0.48 0.26 -0.03 0.19 0.31

Source: Bloomberg. Monthly correlations from 6/30/02-6/30/17. Data series are the same as in Table 2.

Commodities move independently of other assets because the forces driving their supply and demand patterns are unique. Production of most commodities, for example, is highly sensitive to weather and geopolitical strife, both of which tend to have limited effect on the typical blue chip or Treasury bill.

In the wake of the financial crisis, correlations between the asset classes collapsed, and commodities began to move in tandem with equities and other assets. This led many investors to fear that the traditional intra-asset correlation relationships no longer applied.

In recent years, however, the historical supply/demand fundamentals have quietly reasserted themselves, and commodities have regained their independence as an asset class. Commodities' correlations to other asset classes have reverted to historical norms.

Conclusion

Commodities have their ups and downs. But for investors who may have been wary in the past, today's favorable market fundamentals suggest now might be an ideal re-entry point into the asset class.

GraniteShares provides investors with innovative exposure to the commodities market. These ETFs follow the same basic three-point philosophy:

  • Low Cost: GraniteShares ETFs are lower cost than nearly all other competing products tracking the same indexes.5
  • No K-1 Filings: Likely fewer delays at tax-time or surprise income to declare.
  • Familiar Product Structure: 40 Act structures may be familiar to advisors and investors and may avoid certain risks that may be associated with partnerships or other exchange traded products.

Among GraniteShares funds are the GraniteShares Bloomberg Commodity Broad Strategy No K-1 ETF (COMB) and the GraniteShares S&P GSCI Commodity Broad Strategy No K-1 ETF (COMG).

1 Source: World Bank, 2016
2 Bhardwaj, Geetesh; Gorton, Gary; and Rouwenhorst, Geert. Facts and Fantasies About Commodity Futures Ten Years Later". Yale International Center for Finance. 2015. PDF available at:
http://ssrn.com/abstract=2610772
3 In fact, commodities and inflation are so intertwined that commodities are baked into the very definition of inflation, which is commonly measured via the Consumer Price Index (CPI). The CPI's basket is one-quarter comprised of foodstuffs and energy stocks, and it is these two commodity subclasses that primarily drive the measure's day-to-day volatility.
4 Correlations measure how closely the performance of two assets are linked. A correlation of +1.0 indicates two assets that move up and down in perfect sync. A correlation of -1.0 indicates two assets that move perfectly opposite of one another: When one moves up, the other moves down the same amount. A correlation of 0.0 indicates perfect non-correlation: Each asset class moves independently of the other.
5 ETF.com, July 2017

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