A. Stotz All Weather Strategy – August 2020

We move to 50% equity vs. previously 40%. Our long-term view remains unchanged, but we think equity appears attractive in the short run. Keep 30% in gold.

The A. Stotz All Weather Strategy is Global, Long-term, and Diversified:

• Global – Invests globally, not only Thailand
• Long-term – Gains from long-term equity return, while trying to reduce a portion of losses during equity market downturns
• Diversified – Diversified globally across four asset classes

The All Weather Strategy is available in Thailand through FINNOMENA. Please note that this post is not investment advice and should not be seen as recommendations. Also, remember that backtested or past performance is not a reliable indicator of future performance.

Review

Equity markets have continued to rebound in the past three months

• In the past three months, most equity markets continued to rebound
• Developed Europe and Japan lagged the World significantly
  • Asia Pacific ex Japan and the US were the strongest performing equity markets
• In the past three months, we correctly overweighed Asia Pacific ex Japan while our overweight of Japan and underweight of the US turned out to be bad calls

Bonds stayed flattish, as expected

• Our bond target allocation was 30% in the past three months
  • Which is comprised of only Thai government bonds, rather than a mix of global government and corporate bonds
• The reason for our high bond target allocation was to limit the downside
  • Our Thai government bond position has basically been flat since we switched to it, but since equity markets did not crash that didn’t help us much

We had cut our commodities exposure to zero, but they recovered in the past three months

• In the past three months, commodities recovered on increased inflation expectations
• Energy prices rebounded, in August oil price was driven up by a hurricane in the Gulf of Mexico
• Precious metals gained on weaker US dollar and lower real rates and industrial metals advanced on Chinese infrastructure demand
• Soft commodities and livestock gained as well

Gold recorded a new all time high in the past three months

• Our target weight has remained at 30%
• Continued uncertainty has supported investment demand for the gold
• Gold recorded a new all time high in July 2020 and surpassed US$2,000/oz t
• While it closed August below US$2,000/oz t it remained significantly above US$1,900/oz t

Past 3 months: Underperformed as equity rebound continued

• All Weather Strategy: Underperformed World equity by 6.1%
• Gold: Continued to perform well, as Central banks let the money printers work
  
• Bonds: Stayed flat since our switch to Thai short-term government bonds

Since inception: Underperformed World equity but has had lower drawdowns

• The All Weather Strategy has mostly had 45-65% equity target weight and a 25% gold allocation
• Since June 2nd: Equity 40%, Bonds 30%, Gold 30%
• The downside has been reduced compared to an equity-only strategy

Since inception: The All Weather Strategy has had less than half the volatility of World equity

• The volatility of All Weather Strategy has been less than half the volatility of World equity
• 25-65% target weight to equity has reduced volatility
• As gold is generally uncorrelated to equity, it has dampened the overall All Weather Strategy volatility

Since inception: Has lost less when World equity has fallen

• A key feature of the All Weather Strategy is that it aims to lose less when equity markets fall
• Looking at the 10 worst days of World equity since the inception of All Weather Strategy, the has strategy has lost less on every day so far
• Much due to low equity weight and gold allocation

Since inception: The All Weather Strategy has mainly outperformed when equity has suffered big drops

• Largest outperformance has been in the months of  Mar-20, Feb-20, May-19, and Aug-19 when World equity fell the most
• Gold and bonds have served as an effective hedge in most of the down months

Weights

Raise target equity allocation to 50%

• Reducing weight in bonds to 15% from 30%
• Raise equity exposure to 50% from 40%
• We raise US equity weight to 10% from 5%
  • We still see the biggest risk in US equity, hence, still an underweight of US equity

Increasing Asia Pacific ex Japan equity

• Increase the target weights in Asia Pacific ex Japan to 25% from 10%
• We put 5% into commodities, which we had previously cut to zero

Increase equity, reduce bonds

• Equity up to 50%, move target allocation from bonds to equity
• Asia Pacific ex Japan looks most attractive within equity
• Gold and Bonds to serve as a hedge if equity markets would fall

Outlook

US is now even more overvalued

• Massive Fed injection pumps up US market
• The presidential election coming up in November increases uncertainty in the US
• We maintain our view, that the US is overvalued and has seen fundamentals peak
• However, we see that Fed intervention, the upcoming US election, and big Tech could drive the market further in the short-term, why we raised our weight to 10% from 5%

Conditions are in favor of Asia

• Our global growth outlook remains gloomy
• A full recovery following the global COVID-19 shutdowns could take a long time
• We see Asia as the strongest growth engine in the post-COVID era, and we allocate 25% to Asia Pacific ex Japan

Conservative allocation

• We’re still cautious on equity, especially the US
• Even when COVID-19 is under control, many concerns remain, e.g., geopolitical tensions, mass unemployment, and debt issues
• However, we see that equities have good momentum and the asset class could move further in the next three months
• With 30% in gold and 15% in bonds, we still consider our weights conservative

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: EM has the lowest PE and Japan the lowest PB
• Momentum: US up the most in the past year
• Risk: Lowest gearing is found in Asia Pacific and Japan

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