A. Stotz All Weather Strategy – April 2020

The All Weather Strategy has had a slightly lower return than World equity but at much lower volatility. We’re comfortable with our defensive position with 45% short-term government bonds, 30% gold, and 25% equity.

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

Low equity allocation led to underperformance of AWS

• We saw further downside from all-time-high valuations in equities, and we reduced our equity weight to 25% from 45%
• The rebound that began in the end of March continued in April, driven by Fed’s money printing and increased optimism around the COVID-19 pandemic
• The equity rebound and our low equity allocation explain AWS’ underperformance in April 2020

High government bond allocation stayed flat in terms of return

• Increased bond allocation to 45% from 25%, we’ve shifted the bond allocation to only Thai government bonds
• Our bond position was basically flat in the month of April
• The primary reason for us to increase the target allocation and switch to government bonds was to limit downside risk, and in that sense, we were successful

Commodities dragged down by oil, gold kept up well

• Cut our commodities exposure to zero, much to avoid impact from the oil price war
• April 2020, marked the first time we saw a negative price on an oil future, and energy-related commodities were the main drag
• We increased the target weight for gold to 30% from 25%
• Continued uncertainty has supported investment demand for the yellow metal

April 2020: Underperformed as equity rebounded forcefully

• All Weather Strategy: Underperformed World equity by 6.8%
• Gold: Continued uncertainty drove the price
• Bonds: Flattish, as expected after the switch to short-term Thai gov’t bonds

Since inception: Underperformed slightly with lower drawdowns

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

Since inception: 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 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: AWS 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 has fallen the most
• Gold and bonds have served as an effective hedge in most of the down months

Outlook

Countries start to slowly re-open, but we don’t expect a V-shaped recovery

• We can see that more countries start to either get the COVID-19 outbreak under control or has decided that now it’s time to re-open the economy
• While this is positive, we think the consequences of the economic shutdowns around the world will be revealed and it won’t be a V-shaped recovery in the economy

Jobless claims in the US at 30 million despite the fastest money printing in history

• The money printer can’t go “brrr” forever, and since the Global Financial Crisis the rescue packages (read money printed) have had to become larger to stimulate the economy
• In just six weeks, jobless claims in the US reached 30 million, basically erasing all jobs created after the 2009 recession

US valuation remains elevated

• Valuations are still not cheap compared to long-term averages in the US, while Emerging markets are trading below its long-term average PE and PB
• As such, we think there’s more downside risk in equity
• And we continue to focus on downside protection, even if it means lagging world equity in the short term

We stay focused on downside protection

• As we don’t think the re-opening of economies around the world will lead to a full recovery straight away, our global growth outlook remains gloomy
• Therefore, commodities remain unattractive in our view
• We are still comfortable to overweight defensive assets; gold and bonds

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: EM has lowest PE and Japan lowest PB, Dev. Europe valuation has come down a lot
• Momentum: US down only 3% in the past one year
• Risk: Lowest gearing is found in Asia Pac & Japan

 

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