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  • Guided Allocation

    All About P/E Expansion in 2019

    David Schassler, Portfolio Manager
    January 27, 2020
     

    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.

    Overview

    The VanEck NDR Managed Allocation Fund (the “Fund”) ended the year up 2.09% in December, by comparison, its blended 60/40 benchmark was up 2.11%. At yearend, the Fund held a 72% allocation to stocks and a 28% allocation to bonds. Holding more stocks and less bonds helped, as the MSCI All Country World Index returned 3.52% versus -0.07% for the Bloomberg Barclays US Aggregate Bond Index. Regionally, the Fund was overweight the U.S. and Japan, and underweight the emerging markets. This hurt as, relative to the MSCI All Country World Index, the U.S. and Japan lagged and emerging markets outperformed.

    In January, the Fund’s top-level asset allocation remained unchanged. The Fund has been overweight stocks since November. In the last two months of 2019, the MSCI All Country World Index was up 6% and the Bloomberg Barclays US Aggregate Bond Index was down 0.1%. The Fund continues to favor stocks over bonds and the U.S. over international equities. The Fund is now modestly overweight Emerging markets equities, from a previous underweight position, and has increased its exposure to U.S. growth stocks.

     

    Average Annual Total Returns (%) as of December 31, 2019
      1 Mo YTD 1 Year 3 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    2.09 11.21 11.21 5.56 6.05
    Class A: Maximum 5.75% load -3.77 4.81 4.81 3.51 4.34
    60% MSCI ACWI/
    40% Bloomberg Barclays US1Agg
    2.11 19.81 19.81 9.55 8.98
    Morningstar Tactical Allocation
    Category (average)2
    1.98 14.61 14.61 6.46 6.07


    Average Annual Total Returns (%) as of September 30, 2019
      1 Mo YTD 1 Year 3 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    0.18 5.95 -3.49 4.05 5.00
    Class A: Maximum 5.75% load -5.57 -0.14 -9.03 2.01 3.19
    60% MSCI ACWI/
    40% Bloomberg Barclays US1Agg
    1.08 13.61 5.60 7.48 7.98
    Morningstar Tactical Allocation
    Category (average)2
    0.35 9.95 -0.36 5.01 5.58

    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.

    The S&P 500 Index was up 31.5% in 2019! That is its best return since 2013. Rarely is the S&P 500 Index up that much in one year. But let’s be careful not to translate directly equity market price appreciation into economic strength.

    2019 was all about P/E expansion. Earnings growth on the S&P 500 Index was flat, but prices soared. A big part of that run was from making up lost ground. 2019 started shortly after the trough in nearly a 20% market correction. The two key headline risks that dominated the markets over the year were the Fed and the trade war with China.

    The chart below shows that 16.7% of returns in 2019 was the market recovering from its previous correction. Once it accomplished that, it then went on to earn another 12.7%. Not too bad, indeed.

    Strong Returns Following 2018 Correction But Also Flat Earnings Growth
    (S&P 500 Index: September 2018 to December 31, 2019)

    S&P 500 Index: September 2018 to December 31, 2019

    Source: Bloomberg, VanEck. Data as of December 31, 2019.

    While we do not make long-term market predictions, it is hard to get excited about the prospects for U.S. equities in 2020. The trailing price-to-earnings ratio of the S&P 500 Index is 21.6. That is fairly rich when you consider that the 30-year average is 19.69.

    Arguably the bigger story is the continued outperformance of growth versus value. The chart below shows that, based on rolling 3-year windows, growth has been outperforming value for about a decade now.



    After a Decade of Outperformance, Risks to Growth Becoming More Evident?
    (Russell 3000 Growth/Value Spread: Rolling 3 Year Periods from May 1998 to December 2019)

    Russell 3000 Growth/Value Spread:  Rolling 3 Year Periods from May 1998 to December 2019

    Source: Bloomberg, VanEck. Data as of December 31, 2019.

    To help better contextualize the strength of growth, one can simply look at Apple. It currently accounts for 4.8% of the S&P 500 Index and 8.8% of the Russell 1000 Growth Index. That is a lot of individual security risk for investors to assume given that indexation is the preferred method of investing for many. This is a stock that returned 89% last year, trades at a trailing P/E of 26.7 and has a market capitalization of nearly $1.4 trillion.

    The never-ending debate on growth versus value is seemingly more alive now than ever. Regardless of where you find yourself on this topic, one thing that we can all likely agree on is that no winning trade lasts forever and that the risks to growth are becoming more and more exacerbated.

    The Fund continues to maintain its overweight growth position. Largely because its philosophy is deeply rooted in trend following and, by default, efficient market pricing. Therefore, the NDR model that drives the allocations typically holds overweight positions in assets that the market is rewarding. These same signals are designed to help the Fund exit these positions once the market changes direction, as opposed to predicting when that change of direction will occur.

    Weight-of-the-Evidence

    The Fund increased its allocation to emerging markets equities, from 5.5% to 7.8%, based on improving non-price based indicators. More specifically, the model identified strength in commodities, which is a key driver of emerging markets.

    The chart below shows that the composite of non-price based indicators increased from 50 (neutral) to 65 (bullish).

    Increased Emerging Markets Allocation Driven by Bullish Change in Non-Price Based Indicators
    (NDR Emerging Markets External (Non-Price Based Indicators) Composite: January 2016 to December 2019)

    (NDR Emerging Markets External (Non-Price Based Indicators) Composite:  January 2016 to December 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/.

    The other large shift this month was the increase in U.S. growth stocks. There are a few reasons why:

    The NDR Stocks Above 50-Day MA indicator turned bullish. It measures the percentage of growth stocks trading above their 50-day moving average minus the percentage of value stocks trading above their 50-day moving average. A positive value favors growth and a negative value favors value.

    Performance of Growth Relative to Value Leads to Increase in U.S. Growth Allocation  
    (50-Day Moving Average of Growth/Value Stocks:  January 2016 to December 2019)

    50-Day Moving Average of Growth/Value Stocks:  January 2016 to December 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/.


    The Net New Highs indicator turned bullish.
    It measures market breadth of growth versus value stocks. It is calculated as the number of growth stocks making new highs minus the number of value stocks making new highs.

    More Growth Stocks Making New Market Highs 
    (Market Breadth of Growth vs. Value Stocks:  January 2016 to December 2019)

    Market Breadth of Growth vs. Value Stocks:  January 2016 to December 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/.


    The Net Median Earnings Revision indicator turned bullish.
    It measures positive earnings revisions between growth and value stocks. The indicator turn bullish (favors growth) when the short-term average falls below the long-term average.  

    More Positive Earnings Revisions for Growth than Value
    (Long-Term vs. Short-Term Earnings Revisions:  January 2016 to December 2019)

    Long-Term vs. Short-Term Earnings Revisions:  January 2016 to December 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/.



    To conclude, it is likely that the market is in the late stages of a bull run and continues to march higher. There are clear risks in the market and the model is reading that. However, until the price action in the market confirms these risks, the Fund is expected to remain overweight equities.

    NDR Indicator Summary, January 2020

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


    Asset Class Positioning vs. Neutral Allocation,  January 2020

    Asset Class Positioning vs. Neutral Allocation, January 2020

    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.

    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.

    1The 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.

    2Morningstar 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, a fund must have minimum exposures of 10% in bonds and 20% in equity. Next, a 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 September 30, 2019, the Fund ranked 173 out of 275 funds for the 1 month period; 215 out of 272 funds for the YTD period; 197 out of 267 funds for the 1 Year period; 166 out of 250 funds for the 3 Year period; and 153 out of 250 funds since inception. As of November 30, 2019, the Fund ranked 81 out of 270 funds for the 1 month period; 196 out of 267 funds for the YTD period; 199 out of 262 funds for the 1 Year period; 157 out of 246 funds for the 3 Year period; and 143 out of 245 funds since inception.

    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 Markets 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 wcaptures 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, limited number of holdings, 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.