Executing Real Trades Relative to a Theoretical Model Involves High Risk of Slippage Costs

Ascendere Model Portfolio Daily Update:  November 1, 2010

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Of Note:

Fundamentals are sharply improving and valuations remain compelling
As of October 31, 2010, 24 stocks made it our Core and Opportunistic Model Long Portfolios, and 11 made it our Core and Opportunistic Model Short Portfolios.  This compares to 19 stocks on the long side (adjusted to 18 a day later) and 19 stocks on the short side the previous month.  The sharp change in the number of stocks in each portfolio reflects a surge in improving fundamentals and relative valuations of stocks.  The continued momentum in improving company specific fundamentals makes us optimistic that the current rally may actually be extended beyond election results on November 2 and an expected enactment of quantitative easing policies following the FOMC meeting on November 3.  That is not to say we have clarity either way.  But in our opinion, it is a good idea to continue to follow the models, which assume we are invested again.

Theoretical models are difficult to execute in reality; high risk of slippage
Our model long portfolios, which exclude costs of any kind and are not reflective of any real portfolio, were up 0.13% versus the S&P 500 return of 0.09%.  However, rebalancing the portfolios today in actuality would have had a wide range of returns relative to the S&P 500 today.  This is because the S&P 500 (and stocks in general) opened with a gap up, rose about 10 points higher subsequently declined by 15 points to close to negative 5 points at one point, only to finish only 1 point up on the day.  Real basket trades executed today may already be lagging the S&P 500 by a full percentage point.  This is the risk of slippage in executing real trades versus a theoretical model that we have emphasized on numerous occasions.

To mitigate this risk, it may make better sense to execute VWAP trades — volume weighted average price — which is an execution service offered by some brokerage firms that guarantees an weighted volume average price over a specified time frame in advance.  While an investor may be guaranteed the average price over a specified time, he is losing his ability to use discretion.  We are also possibly considering executing trades one or two days prior to the first day of any month.  It seems like the first trading day of any month is more volatile than usual, but we are going to have to backtest to get a better idea.  Whatever method of executing a theoretical model in reality, it may be a wash over the long term.  For example, on October 1 we probably saved ourselves at least 50 basis points by using discretionary timing to execute a basket trade, and today on November 1 we probably lost almost 100 basis points.  For our models based on real trades, we will allow ourselves a few more months of discretionary execution and reassess our position then before moving to a VWAP execution style.

Actions Taken for November to Date:
Model portfolios were rebalanced following the 10/31/2010 close.

This daily update is a supplement to a monthly report dated October 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”).  The daily update alerts readers to portfolio changes, provides updated rolling price targets and stops, and reports daily returns and updates to month-to-date and year-to-date returns.  None of the information in this report is representative of any investment management service we offer.  Please see our disclosures and disclaimers at the back of this report.