A. Stotz All Weather Strategy – July 2020

The All Weather Strategy had a lower return than World equity in July, as equity rebound continued. We continue to focus on downside protection with 30% short-term gov’t bonds and 30% gold. Gold has also helped the return of the strategy and was the best performer in July.

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 continued to rebound in July

• In July, most equity markets continued to rebound
• Exceptions were Developed Europe and Japan which fell slightly
• Emerging Markets and Asia Pacific ex Japan were the strongest performers

Main equity weight, Japan, was the worst performer

• In our latest revision, we primarily wanted to increase equity slightly and underweight US
• Asia Pacific ex Japan stocks continued to do well in July 2020, as most countries seemed to have the COVID-19 pandemic under control
• Like in June, while Japan equities remain cheap, it ended up as the worst performer in July as well

Bonds stayed flattish, as expected

• Our bond target allocation is 30%
  • Now, only Thai government bonds, rather than a mix of global government and corporate bonds
• The reason for our high bond target allocation is to limit the downside
  • That Thai government bond position has basically been flat since we switched to it

Commodities recovery continued in July

• Previously we cut our commodities exposure to zero and we maintain that position
• In July, commodities continued to rebound, driven by precious and industrial metals
• 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 an all-time high in July

• Our target weight for gold stands at 30%
• Continued uncertainty has supported investment demand for the yellow metal
• Gold recorded a new all-time high in July 2020

July 2020: Underperformed due to equity rebound and 30% bond allocation

• All Weather Strategy: Underperformed World equity by 1.4%
• Gold: Best performer
• Bonds: Stayed about flat
• Asia Pac ex JP: Second-best performing equity
• Japan: Worst performing equity in July 2020

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%
• 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: All Weather Strategy 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: 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 has fallen the most
• Gold and bonds have served as an effective hedge in most of the down months

Outlook

US remains at risk

• Massive Fed injection pumps up US market
• Election coming up in November increases uncertainty in the US
• Weaker US dollar reflects the weaker US economy and hit from COVID-19 and protests
• Based on FX, it appears the market expects EU and Japan to do better and recover faster
• We maintain our view, that US is overvalued and has seen fundamentals peak

Global growth outlook remains gloomy

• Our global growth outlook remains gloomy
• As such, we see commodities as unattractive, even though dollar weakness can support the asset class in the near term
• 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

Focus on downside protection

• We continue to focus on downside protection, even if it means lagging world equity
• Even when COVID-19 is under control and economies reopen, many concerns remain
• Geopolitical tensions, mass unemployment, and debt issues remain

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE by far
• Valuation: Emerging Markets has the lowest PE and Japan 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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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.