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  • Guided Allocation

    Aging Bull May Be Put to Pasture

    David Schassler ,Portfolio Manager
    May 22, 2019
     

    VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures each month across global stocks, U.S. fixed income, and cash. It utilizes an objective, data-driven process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research ("NDR"). The Fund invests based on the weight-of-the-evidence of its objective indicators, removing human emotion and decision making from the investment process. The expanded PDF version of this commentary can be downloaded here.

    Weight-of-the-Evidence Summary

    Indicators suggest end of bull market may be close

    • As of the beginning of May, almost all the technical indicators are bullish. The 120-day relative momentum indicator, changing from bearish to bullish in April, allowed the Fund to transition to a moderate overweight equity position.
    • Macroeconomic and fundamental indicators are mixed. Economic activity and earnings growth are slowing, and the cyclical sectors are outperforming, which is a bullish signal.
    • Sentiment amongst analysts is improving. More analysts are revising upward their estimates of future earnings.

    Performance and Positioning

    The VanEck NDR Managed Allocation Fund (the “Fund”) returned 1.93% versus 2.07% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in April.*

    Stock investors reaped the benefits of another great month. Global stocks returned 3.55%, far outpacing the 0.03% return from bonds. The asset class positioning of the Fund was neutral relative to the benchmark. The largest relative overweight equity region positions were in both the U.S. and Pacific ex. Japan. The largest relative underweight equity region positions were in Japan and the U.K. Within the U.S., the Fund was overweight growth, underweight value, and overweight large-cap and small-cap.

    May sees the Fund increasing its equity allocation to 72%, and reducing its bond allocation to 28%. At the end of April, the evidence pointed to higher stock prices in the near-term. However, given the mixed indicator readings, we believe the Fund is now well positioned to quickly react to any potential future shocks.

    Average Annual Returns (%) as of April 30, 2019
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    1.93 7.27 0.36 6.17
    Class A: Maximum 5.75% load -3.91 1.10 -5.42 4.08
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    2.07 10.78 5.76 8.24
    Morningstar Tactical Allocation
    Category (average)1
    1.69 9.13 2.39 5.86

    Total Returns (%) as of March 31, 2019
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    1.20 5.24 -1.85 5.65
    Class A: Maximum 5.75% load -4.61 -0.82 -7.49 3.51
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    1.56 8.54 3.93 7.72
    Morningstar Tactical Allocation
    Category (average)1
    1.11 7.14 0.27 5.17

    The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Index returns assume that dividends of the Index constituents in the Index have been reinvested.

    Returns less than a year are not annualized.

    Expenses: Class A: Gross 1.83%; Net 1.36%. Expenses are capped contractually until 05/01/20 at 1.15% for Class A. Caps excluding acquired fund fees and expenses, interest, trading, dividends, and interest payment of securities sold short, taxes, and extraordinary expenses.

    Weight-of-the-Evidence

    The Fund celebrates its three-year anniversary this month. Much has happened over this time, including significant geopolitical events and severe market corrections. The Fund got some calls right and some wrong, but since inception, it has delivered a strong absolute return to our investors. Going forward, we believe that the Fund is well-positioned to navigate this aging bull market.

    The bull is certainly aging. Soon enough, it will likely be put out to pasture. This chart contextualizes the magnitude of the run-up in asset prices. Specifically, it shows the frequency of 10-year returns for the S&P 500®Index since 1929. The average 10-year return for the S&P 500 Index is 105%. We are significantly above that number. As of April 30, the 10-year return is 238%.

    The Aging Bull: Current S&P 500 10-Year Return Significantly Higher Than Average

    Distribution of 10-Year Returns (April 1929 to April 2019)

    Current S&P 500 10-Year Return

    Source: Bloomberg, VanEck. Data as of April 30, 2019. Past performance is no guarantee of future results. Charts are for illustrative purposes only. Investors cannot invest directly in an index.

    An even more dramatic figure is 305%. That is the 10-year S&P 500 Index return, from the market bottom, on March 9, 2009, to March 9, 2019. The only other time period when the 10-year market return exceeded 300% was the boom and bust cycle of the 1990s. After that, investors endured what became known as “the lost decade” for stocks, with the S&P 500 Index posting abysmal returns for the next 10 years due to two major market corrections. It is our view that much of that pain could have been avoided through a disciplined approach to tactical asset allocation.

    At the start of the month, technical indicators were bullish, but here we are now. It is mid-May and the markets are starting to rumble, again. This time it is over concerns about a trade deal with China. Will it turn into a meaningful drawdown? Maybe. The model is already picking up on the risks. Here are a few of the indicators which we are paying the most attention to:

    Since the end of April, the 120-day relative momentum has been flirting with a bearish reading. When long-term technical indicators struggle to maintain a bullish reading it is a good indication that we may be in a bear market.

    Long-Term Technical Indicators Flirting With Bearish Reading

    120-Day Stock/Bond Relative Momentum (January 2018 to May 2019)

    120 Day Stock Bond Momentum

    Data as of May 13, 2019. Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

    Global market breadth recently turned bearish. As you can see below, the percentage of countries trading above their intermediate-term average is falling. Declining market breadth is telling us that the rally may be fizzling out.

    Declining Global Breadth Suggests Market Stalling

    80-Day ACWI Market Breadth (January 2018 to May 2019)
    80-Day ACWI Market Breadth

    Data as of May 13, 2019. Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

    Realized volatility is also another indicator that we are watching closely. Right now, this indicator remains subdued. This will change very quickly if the recent surge in volatility continues.

    Volatility Subdued For Now

    Annualized Standard Deviation (January 2018 to May 2019)

    Annualized Standard Deviation

    Data as of May 13, 2019. Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

     

    We write and speak often about how we are in the late stage of the market cycle. Economic and earnings growth are slowing, volatility is rising, and the long-term technical indicators are warning that we may be in a bear market. But that does not mean that stock prices must fall from here. There may be a little more fight left in this old bull. The Fund has a 72% allocation to stocks. If the turmoil in the markets continues, you should expect us to respond quickly by reducing our equity exposure.

    NDR Indicator Summary, May 2019

      Macro/Fundamental Technical Overall
    Stocks, Bonds, or Cash      
    Stocks (vs. Bonds) Bullish Bullish Bullish
    Bonds (vs. Cash) Bullish Bullish Bullish
     
    Global Regional Equity      
    U.S. Bullish Bullish Bullish
    Canada Neutral Bullish Neutral
    U.K. Bearish Bearish Bearish
    Europe ex. U.K. Bearish Bullish Bearish
    Japan Bearish Bearish Bearish
    Pacific ex. Japan Bearish Neutral Bearish
    Emerging Markets Neutral Neutral Neutral
     
    U.S. Cap & Style      
    Large-Cap Bullish Bearish Bullish
    Small-Cap Bearish Bullish Bearish
    Growth Bearish Bullish Neutral
    Value Bullish Bearish Neutral

    Asset Class Positioning vs. Neutral Allocation, May 2019

    Asset Class Positioning

    The neutral allocation, which is provided by Ned Davis Research, Inc., represents the starting point of the Fund’s model absent an alternative recommendation once the model takes into consideration the indicators that yield the global tactical allocation model. These are not recommendations to buy or sell any security.


    IMPORTANT DISCLOSURES

    *All weighting comparisons are relative to the blended benchmark (60% MSCI ACWI/40% Bloomberg Barclays US Agg.) or neutral allocation. This represents the starting allocation point absent an alternative recommendation once the model takes into consideration the indicators that yield the global tactical allocation model.

    1Morningstar category averages are equal-weighted category (total) returns. The calculation is the average of the total returns for all funds in a given category. The standard category average calculation is based on constituents of the category at the end of the period. Total return reflects performance without adjusting for sales charges or the effects of taxation, but is adjusted to reflect all actual ongoing fund expenses and assumes reinvestment of dividends and capital gains. If adjusted, sales charges would reduce the performance quoted.

    The Morningstar Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. To qualify for the tactical allocation category, the Fund must have minimum exposures of 10% in bonds and 20% in equity. Next, the Fund must historically demonstrate material shifts in sector or regional allocations either through a gradual shift over three years or through a series of material shifts on a quarterly basis. Within a three-year period, typically the average quarterly changes between equity regions and bond sectors exceeds 15% or the difference between the maximum and minimum exposure to a single equity region or bond sector exceeds 50%. As of March 31, 2019, the Fund ranked 133 out of 273 funds for the 1 month period; 201 out of 273 funds for the YTD period; 203 out of 269 funds for the 1 Year period; and 130 out of 253 funds since inception. As of April 30, 2019, the Fund ranked 97 out of 285 funds for the 1 month period; 200 out of 285 funds for the YTD period; 190 out of 281 funds for the 1 Year period; and 131 out of 262 funds since inception.

    2The Fund’s benchmark is a blended unmanaged index created by the Van Eck Associates Corporation (the “Adviser”) consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 24 emerging markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

    Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market-capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 Index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 Index that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index. U.S. stocks are measured by the Russell 3000 Index which is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America and is based on market capitalization. The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe. The MSCI Canada Index is designed to measure the performance of the large and mid cap segments of the Canada market. The MSCI Pacific ex Japan Index captures large and mid cap representation across 4 of 5 developed markets (DM) countries in the Pacific region (excluding Japan). Emerging Market stock are measured by the MSCI Emerging Markets Index which captures large and mid cap representation across 24 Emerging Markets (EM) countries. The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market.

    The S&P 500® Index consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation). International stocks are measured by the MSCI EAFE captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc. Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Results reflect past performance and do not guarantee future results.

    You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. Because the Fund is a “fund-of-funds,” an investor will indirectly bear the principal risks of the exchange-traded products in which it invests, including but not limited to, risks associated with cash and cash equivalents, debt securities, exchange traded products, exchange traded products’ underlying investments, below investment grade securities, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, common stock, concentration, derivatives, emerging markets, investment style, small-, medium- and large-capitalization companies, market, model and data, operational, portfolio turnover and regulatory risks. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product’s shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise.

    Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus. An investor should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.