June 4, 2012: Asset Class Trend Review
06/05/2012 0 comments
Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, July 2, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.
As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.
Also please note that we now list the next re-balance date on every portfolio page.
Asset Class Trend Review
2012 again turns out to be unusual. Year to date, investors started with euphoria about economic recovery and relatively strong corporate earnings. As we approached to the summer, European situation took a big turn: first we had Greek bailout and then its general election, then the situation became worse, the sovereign debt issues in Spain and Italy followed. Finally, the once perceived US decoupling from Europe is in doubt with many domestic economic indicators pointing down.
In the above backdrop, let's first review the five major risk asset classes:
Asset Class Performance Comparison (as of 6/4/2012)
| Portfolio/Fund Name | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| VWO (Emerging Mkt Stks) |
-3% | -22% | -67% | 8% | 30% | -1% | -1% |
| VTI (US Stks) |
2% | -2% | 19% | 14% | 106% | -1% | 1% |
| VNQ (US REITs) |
6% | 5% | 12% | 26% | 100% | -1% | -2% |
| VEA (Developed Country Stks) |
-4% | -19% | -36% | 4% | 60% | ||
| DBC (Commodities) |
-5% | -16% | -71% | 2% | 27% | 1% | 2% |
Even though the US stocks and REITs are still positive year to date, their general trends are now down, as can be seen in the major asset trend table (see 360° Market Overview for daily update on many asset class trend scores)
Major Asset Classes Trend
06/04/2012
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
|---|---|---|---|---|---|---|---|
| Intermediate Treasuries | IEF | 1.54% | 2.78% | 4.19% | 5.3% | 14.59% | 5.68% |
| Municipal Bonds | MUB | 0.31% | 0.11% | 1.39% | 6.04% | 10.51% | 3.67% |
| US Credit Bonds | CFT | 0.73% | -0.32% | 0.68% | 4.36% | 8.0% | 2.69% |
| Total US Bonds | BND | 0.67% | 0.82% | 1.79% | 2.48% | 6.35% | 2.42% |
| Emerging Mkt Bonds | PCY | 0.04% | -3.3% | -1.0% | 4.27% | 7.45% | 1.49% |
| Mortgage Back Bonds | MBB | -0.01% | -0.06% | 0.85% | 1.63% | 3.81% | 1.24% |
| US Equity REITs | VNQ | -3.35% | -7.85% | -1.36% | 10.44% | 5.12% | 0.6% |
| Treasury Bills | SHV | 0.01% | 0.02% | 0.02% | 0.01% | 0.02% | 0.02% |
| International Treasury Bonds | BWX | 0.88% | -1.59% | -1.26% | 1.27% | -1.98% | -0.54% |
| US High Yield Bonds | JNK | -1.31% | -4.37% | -3.28% | 3.08% | 2.16% | -0.74% |
| Gold | GLD | 3.04% | -1.11% | -5.03% | -5.98% | 4.55% | -0.91% |
| US Stocks | VTI | -3.28% | -6.81% | -6.35% | 2.29% | 0.11% | -2.81% |
| International REITs | RWX | -1.68% | -7.86% | -6.29% | 2.07% | -12.49% | -5.25% |
| Frontier Market Stks | FRN | -2.47% | -10.39% | -9.66% | 4.49% | -11.1% | -5.83% |
| International Developed Stks | EFA | -2.41% | -10.85% | -13.84% | -7.56% | -19.49% | -10.83% |
| Commodities | DBC | -4.57% | -8.54% | -15.27% | -10.03% | -16.86% | -11.05% |
| Emerging Market Stks | VWO | -0.93% | -10.94% | -15.98% | -7.76% | -20.4% | -11.2% |
Outside of the five major risk assets, 'safe haven' or quality assets such as (long) Treasury bonds (IEF), municipal bonds (MUB) and investment grade bonds (CFT) are all in favor. Riskier bonds such as high yield bonds (JNK) and international bonds (BWX) are weak.
The four corner assets have behaved beautifully recently, hedging out recent stock weakness:
Inflation, Deflation and Prosperity Asset Performance (as of 6/4/2012)
| Portfolio/Fund Name | 1Wk Retun | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| LTPZ (TIPs, Inflation) |
3.35% | 10% | 30% | 179% | ||||
| TLT (Long Treasury Bonds, Deflation) |
4.81% | 8% | 39% | 153% | 17% | 64% | 12% | 57% |
| SPY (US Stks, Prosperity) |
-3.03% | 3% | 0% | 10% | 13% | 84% | -2% | -5% |
| GLD (Gold, Inflation) |
3.04% | 4% | 5% | 41% | 18% | 121% | 19% | 79% |
Looking ahead, we offer the following observations:
- US stocks: near term, if the economy goes to recession, it will definitely experience further price reduction. However, if Bernanke and other central bankers manage to further stimulate risk assets, it could recover, just like in 2011. Regardless, we maintain pessimistic view on current stock valuation.
- European, Japan and other developed country stocks: it is the weakest asset at the moment. It can have further downside risk until the sovereign debts in these countries are resolved in a more structured way.
- Emerging market stocks: even for this once high flying asset class, we are now very cautious as many structural issues have started to emerge. These include export oriented policies, malinvestments and wage/cost pressure.
- US REITs: it has been very resilient up to now. Being part of the US economic recovery, it has two other appeals: first, it delivers yields consistently. This bodes well to current yield hungry or yield chasing appetite. Secondly, REIT companies have fully utilized current extremely low rate environment to further refinance and strengthen their balance sheets. Unless US economy experiences a major downturn (and/or deflation), these companies have positioned well, even in an inflationary environment (as most of them have done long term refinancing and they will have very low finance cost going forward).
- Commodities: it will be tightly linked with global economy, especially emerging market economies (China, for example). Other than aggriculture commodities, it will face major hurdles.
- Bonds: as an asset class, bonds are not going to perform well in a longer term as their yields have been depressed to such historical low levels. However, they are still important and will function as more like insurance in the near term stock weakness or in a further deflationary environment. We view this asset class as more like insurance going forward instead of a fixed income safe asset.
- Gold: the hard currency that will be very volatile going forward. Given its current price level, gold might experience further weakness if economy goes a severe recession. On the other hand, it is a great hedge against currency debasing and inflation.
As many of our readers might know, we maintain that the above observations we have are purely educated guesses. What determines a long term investment success is still to follow systematic and well proven asset allocation strategies. For strategic investments, diversification and regular rebalancing in Strategic Asset Allocation(SAA) or investing in a carefully planned diversified and hedged portfolio such as Permanent Income Portfolio or Harry Browne Permanent Portfolio are two major methods we advocate. For tactical investments, we believe that using major asset trend following such as in Tactical Asset Allocation(TAA) is an effective way to reduce risk while enhancing returns.
Portfolio Reviews
We compare our tactical portfolios with several tactical allocation funds:
Portfolio Performance Comparison (as of 6/4/2012)
| Portfolio/Fund Name | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| DWTFX Arrow DWA Tactical A | -3% | -14% | -101% | 7% | 45% | ||
| GDAFX Goldman Sachs Dynamic Allocation A | 1% | -5% | -59% | ||||
| GTAA Cambria Global Tactical ETF | -2% | -11% | -119% | ||||
| P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds | 5% | 6% | 52% | 15% | 97% | 11% | 73% |
| Six Core Asset ETFs Tactical Asset Allocation Moderate | 2% | -4% | -37% | 8% | 61% | 8% | 58% |
Our tactical portfolios have done well.
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