021 - Dave Aspell of Mt Lucas - An Institutional Perspective on the Simplicity of Trend Following

A Deep Dive into Mount Lucas Management's Trading Philosophy and Strategies.

In our latest podcast, we had the pleasure of speaking with Dave Aspell, the Senior Portfolio Manager from Mount Lucas Management. Dave shared invaluable insights into his trading journey, the history and evolution of Mount Lucas, and the firm's unique approach to trading equities and futures. In this show we explore how Dave and his team trade, the super simple strategies they employ, and the key philosophies underpinning their approach.

The Trading Approach at Mount Lucas Management

Mount Lucas Management is renowned for its managed futures strategy, which is rooted in capturing the risk premium in managed futures markets. Their approach is built around a robust and simple trend-following model, epitomized by the MLM Index. Developed in 1988, this model trades 22 futures markets across currencies, bonds, and commodities. The principle is straightforward: if a market is above its one-year moving average, they go long; if below, they go short. This systematic method ensures they capture major market trends without the pitfalls of overfitting or frequent adjustments.

Their market selection focuses on the most liquid futures markets, including six major currencies, five bond markets, and eleven commodities. By prioritizing commodities, which tend to be more volatile and inelastic, they enhance their portfolio's performance through significant price moves. Unlike many trend followers, Mount Lucas avoids volatility targeting. This decision maximizes positive skew, ensuring the strategy provides significant diversification benefits when most needed and maintains robustness during extreme market moves.

In equities, Mount Lucas employs a complementary approach. They maintain a core long equity portfolio, always holding at least 40% in equities to participate in the long-term growth of the market. This portfolio is diversified across value, growth, and low-volatility stocks, aiming to outperform the broader market. Their equity holdings are relatively concentrated, allowing for significant positions in undervalued stocks without sector constraints. This concentrated approach is designed to maximize positive skew, enhancing the portfolio's overall return potential. Frequent rebalancing between equities and managed futures ensures that gains in one part of the portfolio bolster other areas, maintaining an optimal risk-return profile.

History of Mount Lucas Management

Mount Lucas Management has a rich history dating back to the late 1960s. The firm was founded by Frank Vannerson, who initially established Commodities Corp in 1969 with Helmut Weymar. This firm was a pioneer in the managed futures space. In the mid-1980s, Vannerson and his team spun out from Commodities Corp to create Mount Lucas Management, focusing on institutional asset management. In 1988, Mount Lucas developed the MLM Index, a trend-following model designed to provide a benchmark for managed futures performance, which is now investable. The index has remained largely unchanged, testament to its robust and effective design. Over the years, Mount Lucas has expanded its offerings, incorporating equities and macro strategies into their portfolio. Their macro fund, established in 1996, blends discretionary and quantitative strategies, providing a well-rounded approach to portfolio management.

Key Philosophies to Trading at Mount Lucas Management

Mount Lucas Management's trading philosophy is grounded in simplicity, robustness, and a deep understanding of market dynamics. Embracing positive skew is at the core of their approach. By prioritizing strategies that maximize positive skew, their portfolios benefit from significant market moves, enhancing overall performance. This is evident in both their managed futures and equity strategies, where they avoid overfitting and maintain concentrated positions.

Avoiding volatility targeting is another key tenet. By not employing volatility targeting, Mount Lucas ensures their strategies remain robust and effective, even during extreme market conditions. This helps maintain the integrity of their trend-following model, allowing them to capture the full benefit of market trends. The focus on robustness over optimization further underscores their approach. Favouring simple, robust models helps avoid the pitfalls of overfitting and ensures their strategies perform well across various market conditions. Their managed futures model, based on a one-year moving average, exemplifies this philosophy.

Frequent rebalancing between different asset classes is crucial. This practice helps maintain an optimal risk-return profile and ensures the portfolio remains aligned with their long-term objectives. Rebalancing also allows them to capitalize on gains and mitigate risks, enhancing the overall performance of their portfolios.

Mount Lucas Management's approach to trading is a testament to the power of simplicity, robustness, and a deep understanding of market dynamics. Their managed futures strategy, anchored by the MLM Index, and their concentrated equity portfolio exemplify their commitment to maximizing positive skew and providing true diversification. With a rich history and a steadfast commitment to their core philosophies, Mount Lucas Management continues to be a leader in the world of managed futures investing.