6Welcome to Stage V. This is where most stocks start to decline. While you might have some lagging sectors-such as mining and other resource-based equities-eking out small gains, the broader market starts to fall.Economic activity either slows down or contracts so that commodity prices enter a bear market, thereby signaling Stage VI. This usually happens just before or just after the recession has begun. After a while, we're ready to start the cycle again. Now in some instances there's no recession; just a slowdown in the growth path of the economy. The six stages still operate, but because the gyrations in the economy are less dramatic, volatility in the financial markets is also reduced.Insights: What stage are we in now? Martin: We're currently in Stage II.Insights: How do you determine the current stage? Martin: We use three models: one each for bonds, stocks and commodities. Their status, according to a metric we call "Pring Barometer" scores, determines the stage. For example, if they're all bullish, we're in Stage III. They're all bearish? Stage VI, and so forth. Insights: Can you describe your Pring Barometer scores in more detail? Martin: Each barometer comprises several components. Each has been fairly reliable in the past but certainly not perfect. When the majority of components are positive, so is the barometer. The actual formulas are proprietary. But I can tell you they include trend-following indicators as well as inter-asset relationships. Insights: What input data feed into calculating them? Martin: All of the data are market-driven. Some are published by the Fed. We also incorporate market benchmark data, such as commodity index performance.Insights: How do these scores factor into asset allocation?Martin: The barometer score for each asset class determines its target allocation. For example, commodities consistently lose in Stage II, but that's when stocks do best. Consequently, there's no allocation to commodities or commodity-driven stock sectors in that stage, but a big one for equities in general. At the inflationary back end of the cycle, Stages IV and V see greater allocations to commodities and resource-based stocks and so forth.The approach can only work if the baseline philosophy is properly allocating during each phase.Insights: How did the idea for creating an index based on your investment process come about? Martin: Steve Malinsky of Dow Jones Indexes read one of my books covering the business cycle and felt that the approach would make a great foundation for a dynamic index. I thought it was a great idea, and we began our collaboration.Insights: How did you test your theories to make sure they were usable in the index?Martin: When we devised the Dow Jones Pring U.S. Business Cycle Index, the first task was to develop three models-one each for stocks, bonds and commodities. These were then tested back to the 1950s to ensure they could meet the stresses of a deflationary, inflationary and financial crisis environment. Once we had decided on the stages, we researched which assets and equity market sectors performed the best in each stage. We then selected the best combination.Insights: How does risk come into play?Martin: Good question. The index uses our philosophy which is intended to minimize risk by avoiding or downplaying assets when the business cycle phase is hostile for them. So, for instance, it's going to downplay bonds when commodities and inflation are up. Insights: How have you found working with Dow Jones Indexes? Martin: My experience with working with Dow Jones Indexes was very enjoyable. They never overpromised and always delivered on their commitments.
7Customer SpotlightChuck Martin, Chief Investment Officer, FFCM, LLCChuck Martin and his partners at FFCM have always sought to employ disciplined, rules-based investment strategies based on well-researched approaches that would stand the test of time. When they saw a unique opportunity to provide investors with rules-based strategies designed to have improved transparency and enhanced liquidity, they jumped at the chance. The idea was to create ETFs constructed around the rules-based approaches on which they had always relied. The basis for the funds would be market- and sector-neutral indexes that tracked their strategies.In mid-2011, Chuck founded FFCM, LLC, along with Bill DeRoche and Kishore Karunakaran. In September of that year, FFCM licensed the seven indexes that Dow Jones Indexes had built to track its strategies to serve as the basis of ETFs. Collectively, the indexes were named the Dow Jones U.S. Thematic Market Neutral IndexesSM. "We worked with Dow Jones Indexes to have them develop the index series-with the end goal of FFCM offering ETFs that allow investors to access these familiar strategies through a rules-based approach in a more transparent, liquid and cost-effective manner," he explains. "My partners and I had used similar strategies and methods throughout our careers, in particular market-neutral investing. Because they are rules-based, there is no guesswork to these strategies. The opportunity to license indexes based on these successful strategies made a ton of sense."The indexes in this series are designed to reflect the performance of long/short strategies. They are intended to be both market and sector neutral in order to minimize the effects of the market and industries, revealing the essential themes on which the strategies are based-value, small size, quality, momentum and beta."Indexes like these appeal to us because they provide a means for us to measure these sophisticated strategies in a clear, transparent and easy-to-understand manner," Chuck said.Intelligent indexesChuck says that amid turbulent markets, his clients have one overriding concern: risk. They want buffers against "the twists and turns" that the market offers up with increasing frequency. "The beauty of these indexes is that they are designed to measure performance of strategies that are uncorrelated to the market," he continues. "An index such as the Dow Jones U.S. Thematic Market Neutral Value Index may reflect performance that is different from the greater market. You're attempting to sever the connection between the market and index performance."When asked about FFCM's relationship with Dow Jones Indexes, Chuck responds: "They're very collaborative. I think that might be a reason that we like working with Dow Jones Indexes so much. They're open to our ideas and their construction is really second to none. And their size and reputation were really key in our decision to work with them."Chuck thinks that investors are coming to appreciate that indexes such as those in this series provide an "intelligent" means of tracking sophisticated investment strategies. For more information on the Dow Jones U.S. Thematic Market Neutral IndexSM, visit: >> www.djindexes.com/thematicmarketneutralChuck MartinChief Investment Officer FFCM, LLC