A. Stotz All Weather Strategy – June 2020

The All Weather Strategy had a lower return than World equity in June, as equity remained strong. Fed can’t rescue the market forever, even if the virus is under control, other issues remain. We continue to focus on downside protection with 30% short-term gov’t bonds and 30% 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

Low equity allocation led to underperformance of AWS

• In June, we remained cautious on equity but raised our target allocation to 40% from 25%
• However, the equity market has continued to rebound
• Driven by Fed’s money printing and increased optimism about the COVID-19 pandemic peaking

Higher allocation to the best and the worst equity performers

• In our latest revision, we primarily wanted to increase equity slightly and underweight US
• Asia Pacific ex Japan stocks did well in June 2020, as most countries have opened up the economies and have fewer cases of COVID-19
• While Japan equities remain cheap, it ended up as the worst performer in June as recovery isn’t expected as fast as before

Bonds have stayed flattish, as expected

• In June, we reduced the bond allocation to 30% from 45%
• The reason for our high bond target allocation is to limit the downside
• That bond position has basically been flat since
• We kept the bond allocation to only Thai government bonds, rather than a mix of global government and corporate bonds

Commodities recovery has continued

• Previously we cut our commodities exposure to zero and we maintain that position
• In June, commodities have continued to rebound, driven by oil and industrial metals

Gold recorded new highs in June

• Previously we increased the target weight for gold to 30% from 25%, we maintain that position
• Continued uncertainty has supported investment demand for the yellow metal
• Gold recorded a new high in June 2020 post the European debt crisis in 2008-2012

June 2020: Underperformed as equity rebound continued

• All Weather Strategy: Underperformed World equity by 1.6%
• Gold: Below equity
• Bonds: Stayed about flat, as expected
• Asia Pac ex Japan: Best performing equity
• Japan: Worst performing equity in June 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: 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

Fed can’t rescue the market forever

• The US market was already passing peak profitability and peak valuation
• Coronavirus shutdown was the pin that pricked the bubble
• Massive Fed injection pumps up market, preventing immediate collapse
• The collapse is likely to be long and drawn out

Pressure is mounting as US election is getting closer

• Pressure is mounting as November 3rd US election is all out war to oust Trump and for the Democrats to take control
• Trump stands a chance if the Democrat party pushes the BLM agenda too far
• Otherwise possible that Democrats take full control of the US government
• Political uncertainty is massive, gold may be the best hedge if Democrats win

Re-opening comes with restrictions

• Our global growth outlook remains pessimistic
• Therefore, commodities remain unattractive
• Re-opening comes with restrictions; some businesses won’t open again, and spending patterns may change; a full recovery could take a long time
• We see Asia as being the strongest growth engine post-Covid

Even if the virus is under control, other issues remain

• We continue to focus on downside protection, even if it means lagging world equity in the short term
• We still see a risk of a second wave of COVID-19, which could quickly worsen the outlook
• Even if the virus outbreak is over faster than expected, geopolitical tensions, mass unemployment, and debt issues remain

Regional Equity FVMR Snapshot

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

 

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