STRATFORD: Leading by following the leader
After a tough start, Stratford Capital Management had it best year ever, earning 67.42% in 2011 by keying on the leading sectors and markets to predict the direction of the major equity indexes.
Stratford’s founder, Kevin Benoit, has managed money successfully for both institutions and his own advisory for two decades with a systematic approach, but in 2008 he launched a new and very different strategy.
Benoit’s short-term discretionary equity index program defines the sectors and, in some cases, individual equities that are leading index moves and trades the S&P 500, Nasdaq 100 and Dow futures based on that. If the major indexes have been following one sector and that sector breaks out, the index will follow and Stratford would be in before the move.
“I was able to identify what were the driving forces behind the market, which allowed me to get on the [up-]trends when they were going up, down-trends when they were going down and occasionally go against the trend when I saw [something] really out of whack,” Benoit says. “I may be looking at 10 sectors for every index, but then I look at the top 50 stocks in the index and at groupings of stock that may not be obvious.”
He weighs all these factors and determines what is most influencing the markets. “Lately, I have been watching semi[conductors], especially in the Nasdaq. It is better than Apple or Google even though the weightings are much higher on Apple and Google. The semiconductor sector has been moving the markets,” he says.
What Benoit does is not as easy as it sounds because what sectors the indexes follow change. “Sometimes things will stay the same for a long time and sometimes things will change rapidly. For instance, all year the most important sector was financials. Financials were not always the top sector in weighting in the index, but it was certainly the top sector that everybody was watching for direction,” he says.
When the program has difficulty it usually is because the leading sector changes, but he has a way to watch that as well. He follows the currencies to detect potential changes.
“It helps me determine my influence weighting on the groups of stocks,” Benoit says. “For instance, if the dollar is getting cheaper and oil is moving up, that means that the oil sector is going to be more important. I am not looking at the currency itself, I am looking at how it changes my rankings. If the dollar is getting much weaker or stronger then I know what sectors to pay attention to.”
In August, a month Stratford earned 59%, it was simple. “The battle over extending the debt limit led to extremely choppy markets. That was driving the market up and down every day with huge ranges. I made money every single day. ”
Choppy markets whipsawed long-term and short-term traders alike in 2011, but Benoit avoided this. “One day the market would go up and the next day it would go down, so people who were carrying overnight [positions] got whipped around a lot, but I didn’t because I wasn’t involved,” Benoit says.
His unique discretionary approach also allows him to avoid many of the traps for short-term traders. “I don’t get triggered by programs. When these high frequency traders come in and bomb the market, a lot of people using stops get their stops triggered by these guys. It is less likely to happen to me,” Benoit says. “It may even give me opportunities. If you see the market bombing down and the semis are still roaring to new highs, I am going to be a buyer into that.”
Benoit encourages customers to take profits out following strong performance periods like Stratford has produced over the last two years: 67.42% in 2011 and 58.42% in 2010. That makes the inevitable drawdown less painful and is one reason his assets under management are relatively low. That is bound to change after this year. He also cut his gearing by half in October, which helped keep a fourth quarter dip to a modest -5.22%.