A. Stotz All Weather Strategy – September 2020

The All Weather Strategy outperformed as World equity fell in September. It appears there could be a second lockdown on the way in Europe, first out is the UK. We continue to focus on downside protection with 15% 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

Equity markets fell in September

• In September, all equity markets except Japan fell, and the US was the worst performer
• Raising our target weight to 10% from 5% in the US, was a small drag on performance
• We have a target allocation of 25% in Asia Pacific ex Japan, which constituted a bigger drag

Bonds stayed flattish, as expected

• In the latest revision, we reduced our bond target allocation to 15% from 30% as bonds appeared less attractive
  • The strategy is to hold only Thai government bonds, rather than a mix of global government and corporate bonds
• Keeping bonds at 15% rather than 5% helped to limit the downside
  • That Thai government bond position has basically been flat since we switched to it

Commodities fell back in September

• We increased our commodities exposure to 5% from zero in our latest revision
• In September, commodities fell back on worries about the second wave of COVID-19
• Precious metals and oil lost on a stronger US dollar, and industrial metals retracted on weaker economic sentiment
• Soft commodities gained

Gold pushed down by stronger US dollar

• Our target weight for gold stands at 30%
• A strengthening US dollar pushed down gold in September
• It appears some investors liquidated gold in preference for cash

September 2020: Outperformed due to moderately low equity allocation

• All Weather Strategy: Outperformed World equity by 1.4%
• Bonds: Stayed about flat
• Asia Pac ex Japan: Beat Dev. Europe and the US
• US: Worst performing equity in September 2020
• Gold: Worst performer

Since inception: Below World equity but has had lower drawdowns

• The All Weather Strategy has mostly had a 45-65% equity target weight and a 25% gold allocation
• Since September 3rd: Equity 50%, Bonds 15%, Gold 30%, Commodities 5%
• Reduced downside 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
• Since inception, a 25-65% target weight for equity has reduced volatility
• As gold is generally uncorrelated to equity, it has reduced 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, has strategy has lost less on every bad day so far
• Due mainly to low equity weight; high gold allocation

Since inception: All Weather Strategy has mainly outperformed when equity has fallen

• 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

Outlook

Fed, the upcoming election, and big tech could drive the US market further

• Fed injections and announcements averted an immediate US market collapse, but cannot support the market forever
• The presidential election coming up in November increases uncertainty in the US
• Fed intervention, the upcoming election, and big tech could drive up the US market further in the short-term

The US is overvalued and has seen fundamentals peak

• At this point, if the US market starts to fall, we expect the Fed to announce buying of US stocks
• We maintain our view, that the US is overvalued and has seen fundamentals peak

Gold, oil, and US equity are inversely correlated to the US dollar

• The US dollar strengthened in September, while US equity fell
• Our recent research shows that, for example, gold, oil, and US equity are, to various degrees, negatively correlated to the US dollar

Fed to keep nominal rates low

• We expect the Fed to keep nominal interest rates low to help companies, banks, and government
• Inflation is going to cause negative real interest rates and put downward pressure on the US$ in the longer term, making bonds less attractive

We hold bonds for the diversification benefit

• We’re currently in Thai government bonds
• Though, we expect low rates in the US and Europe and a weak economy to keep rates low in Thailand as well
• We hold bonds for the diversification benefit, rather than the return potential

Keep conservative allocation

• We’re still cautious on equity, especially the US
• It appears there could be a second lockdown on the way in Europe, first out is the UK
• Even when COVID-19 is under control, many concerns remain, e.g., geopolitical tensions, mass unemployment, and debt issues
• 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: Emerging markets have the lowest PE and Japan lowest PB
• Momentum: Only Developed Europe is down in the past year
• Risk: Lowest gearing in Asia Pacific including 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.