03/23/2011

Veteran managers in Mellon Capital have been bullish on U.S. stocks.  In fact, based on the annual report on 9/30/2010 of Vanguard Asset Allocation fund, managed by Mellon Capital, it stated that "Our calculations suggest that the S&P 500 Index should deliver a return of around 9.5% per year over the next ten years. Meanwhile, high-grade corporate bonds currently yield about 4.8%. Given the current risk landscape, an expected risk premium of around 4.7 percentage points modestly favors equities relative to bonds.Accordingly, the Mellon Capital Tactical Asset Allocation Model recommends a 15-percentage-point overweighting in equity and underweighting in fixed income relative to the benchmark.".

Let's take a closer look at a fund managed by Mellon Capital, specifically, Vanguard Asset Allocation Fund (VAAPX) (VAARX). The portfolio managers are Charles J. Jacklin and Thomas F. Loeb. Both are veterans for the fund, having managed the fund for more than 10 years. The fund is an asset allocation fund that mainly invests in U.S. stocks and bonds.
 
The fund was an outstanding performer in the internet bubble period, smartly navigating through the crisis and made the right bets in the market stress and at the market bottom. As a result, it only lost 15% in 2002. However, the fund was not as lucky in the 2008 financial crisis:  it was heavily exposed to U.S. stocks (especially in financial stocks) going into the crisis, losing 36% in 2008. Since then, it has recovered smartly, it gained 15.5% in 2010.

The following table illustrates the asset correlation percentages for Vanguard Asset Allocation Fund in the last four weeks: 

In the above table, the percentages for each asset are derived based on mathematical regression analysis, they do not necessarily reflect the actual allocation percentages. In technical terms, the percentages are more or less as beta coefficients that reflect how strongly the fund is correlated with that specific asset index. The U.S. bonds are represented by ETFs such as iShares Barclay Aggregate Bond Index (AGG) or Vanguard Total Bond Index (BND). The U.S. stocks are represented by ETFs such as SPDR S&P 500 (SPY) or Vanguard Total US stock market index (VTI).

It is very telling that on 3/4/2011, the S&P 500 (SPY) was at 1321 and by the time on 3/18/2011, it lost to 1279. However, in light of this loss, the fund actually increased its beta correlation with the U.S. stocks from 70.84 to 74.48, reflecting the managers' confidence in the U.S. stock market.This is a bullish sign.

The fund has done well year to date: gaining 4.7% to 3/22/2011. For more detailed smart money manager's asset allocation funds analysis, please refer to here.

As more Americans are increasingly relying on retirement investing income to fund their future retirement or financial needs, asset allocation decision plays the most important role in managing one's portfolio to enhance returns and reduce risk. We believe investors can benefit from our timely and quality analysis on some of good asset allocaiton managers' asset outlook and their portfolio management skills.

Symbols:VAAPX,VAARX,SPY,VTI,AGG,BND,EFA,

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