Asset Allocation

At the beginning of the year, we liked the chances for the “Donut Portfolio” to break its 10-year losing streak against the S&P 500. As a refresher, the Donut holds six of seven key assets in equal weights. The S&P 500 is excluded—a decision probably only suitable for allocators who are self-employed. 

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For the last few years, the S&P 500 has been the most richly priced of the broad equity indexes, and its moderate decline, to date, makes it even more so on a “relative” basis. In recognition of that, we began to track the hypothetical allocation strategy of avoiding this index.

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As discussed elsewhere in this section, we had a novel idea for asset allocators tired of chasing the S&P 500: Hop off the treadmill and take a “Donut” break!

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The market difficulties of 2018 were hardly limited to stocks. Commodities, in fact, were the worst performer among the seven major asset classes.

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Asset Allocation in 2018 is about as bad as it gets. No major asset class has done well.

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We are contrarians at heart, but learned quickly that successful contrarian investing is far more complicated than simply buying assets that are down the most in price.

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U.S. 10-Year Treasury Bonds—last year’s Bridesmaid holding—eked out a 1% gain in 2016, a disappointing result but one that preserved a streak of positive annual returns dating back to 2001 (Table 2).

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Hedge funds have shuttered by the dozen in the past few weeks, with the worst carnage among those focused on Emerging Markets and commodities. But the problem is broader.

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Models can prove helpful in overriding an investor’s natural (and frequently costly) impulses. But we’ve come to believe that our long experience in model building and implementation has succeeded not only in overriding these impulses but in actually modifying them.

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Liquidity “consuming” strategies like price momentum are generally considered to be more volatile than liquidity “providing” approaches like value investing.

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Major Trend Index strengthened in April; net equity exposure increased to 61%

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Major Trend Index Neutral: Equity Exposure Remains 52-53%

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We are nothing if not contrarians, but have also highlighted the hazards of “knee-jerk” contrarianism—in which investors are instinctively drawn to the asset, sector, or stock that is down the most in price in the recent past.

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We increased equity exposure back above 50% in mid-November as a result of the MTI returning to Neutral.

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With the S&P 500 at a double digit gain YTD, one would expect those being rewarded are aggressively positioned. We present two hypothetical portfolios and find the hyper-conservative one has nearly doubled the S&P 500 gain.

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Major Trend Index turned negative and as of early October, we are now targeting 40% net equity exposure.

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Net equity target is 55%; waiting for clearer signal from our Major Trend Index (currently rated Neutral).

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Both Portfolios lagged all-equity benchmarks in June; but still ahead YTD.

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Both Portfolios matched their all-equity benchmarks in May, and are outperforming YTD.

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The Major Trend Index remains positive, and our portfolios continue outpacing the market. Net exposure is 65% in both the Core and Global portfolios.

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