Volatility Rules
Dear Investor,
Amidst the ongoing volatility, we thought it may be prudent to provide you with an update on our YTD performance.
Our Tactical Asset Allocation strategies, relative to the S&P 500, MSCI ACWI have slightly outperformed the equity benchmarks so far in 2020 (as of March 6, 2020 evening). Our typical 2020 YTD returns are in the -3% area for our GTAA as well as USTAA strategies, while the S&P 500 returned about -8% YTD. While a coronavirus impact on the global economy is hard to quantify, ultra-conservatism may be the best approach to asset allocation today. We believe that a global economic slowdown is in the cards for 2020 and there is a high probability that we have shifted to a bear regime at least in the stock market. The extent of the slowdown may have been minimized by a 50 basis point emergency Fed rate cut, but the risks remain. Things can change quickly and rest assured, we will continue to re-evaluate your portfolios often.
How then are we positioned today? It is in these turbulent times of bull/bear uncertainties that our TAA strategies help in smoothing out volatility in client portfolios. We rebalanced our portfolio last week quickly and favorably away from equities and towards gold and bonds in our typical portfolio. In other customized settings and accounts, we have also bought VIX futures/ETFs and shorted select sectors such as XLF and XLK, primarily as a reaction to increasing volatility, also highlighted by a high probability of a bear market or at least a deep stock market correction.
However, we will be the first to admit that our forecasting abilities, overlaid with our judgement are not perfect. Indeed, the jump in bear market probability (remarkably from a low 15% to close to 100% in one day) was only determined mid-week on Wednesday, Feb 26 and so while wishful, we could not minimize our downside risk earlier than that. In my experience, a mid-week jump of this size was perhaps the first since 2007-8. With the equity markets now swinging 2-3% every day and intraday, the call for a bear market (or at least staying on the sidelines) after an exceedingly long bull market run is perhaps consensus, yet safe. Overall, we still believe that market overall valuations, by any measure, remain on the high side. We remain conservative in our portfolio allocations with 60% in bonds and gold and 40% in cash. We believe that vigilant re-evaluation of market risk, more or less on a daily basis, in this environment is warranted and our conservative stance will be rewarded.
Here is an interesting Seeking Alpha article below by Lance Roberts. Even Mr. Buffett has not been staying invested in the market, it seems and sits today on $128 billion in cash.
Finally, we are often asked as to what academic papers do really back up or prove the re-allocation approaches/strategies we recommend, rather than the typical advisor recommendation to stay invested all the time in the equity markets. While there are several that we use for our investment process, here is one that I would recommend reading at leisure for the more mathematically inclined. The abstract alone should probably suffice.
Regime Changes and Financial Markets – Ang and Timmermann
As always, thanks for your trust and staying invested with us! For those of you who may be considering these strategies, learning more or investment advice, please feel free to reach out to us.
Sri Nagarajan