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  • Guided Allocation

    At the Tipping Point

    David Schassler ,Portfolio Manager
    December 19, 2018
     

    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

    Weight-of-the-evidence mixed on stocks.

    • Macroeconomic and fundamental indicators are mostly bearish. Defensive sector leadership, slowing economic growth, and stretched valuations are all risk factors. Global monetary policy is tightening, but remains accommodative relative to historical levels.
    • The technical indicator composite is neutral. Bearish indicators include negative price momentum and weak global market breadth.
    • Investor sentiment reached the point of extreme pessimism and started to reverse. Historically, this has indicated a potential buying opportunity.
    • While bond technical indicators are mixed, strong macroeconomic and fundamental factors remain supportive of fixed income over cash.

    Performance and Positioning

    In November, the VanEck NDR Managed Allocation Fund (the “Fund”) returned +1.26% versus +1.14% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index). Last month, global stocks returned +1.46% and U.S. bonds returned +0.60%.1 The Fund’s 20% underweight exposure to stocks detracted from performance. However, the Fund’s regional equity positioning more than offset the performance drag from the asset allocation positioning. The Fund’s underweight positions to the U.K., Europe ex. U.K., and Japan were positive contributors to relative performance.

    The Fund increased its equity allocation from 40% to 58%. While risk remains elevated, extremely pessimistic sentiment has created a near-term buying opportunity. In aggregate, the technical, macroeconomic, and fundamental indicators are now neutral. From its neutral weighting, the Fund is well positioned to react to either the acceleration or abatement of risks in the market.

    Total Returns (%) as of November 30, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    1.26 -4.30 -3.54 5.98
    Class A: Maximum 5.75% load -4.56 -9.81 -9.09 3.56
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    1.14 -1.81 -0.66 6.79
    Morningstar Tactical Allocation
    Category (average)2
    0.76 -3.27 -2.34 5.14

    Total Returns (%) as of Sep. 30, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -0.10 0.85 4.90 8.77
    Class A: Maximum 5.75% load -5.86 -4.95 -1.12 6.12
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    0.03 1.97 5.68 9.02
    Morningstar Tactical Allocation
    Category (average)2
    -0.25 1.76 5.57 8.01

    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 2.33%; Net 1.39%. Expenses are capped contractually until 05/01/19 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

    Risks are elevated, and the markets are noticing. A plethora of evidence still points to lower stock prices. These include: negative stock price momentum and market breadth, defensive sector leadership, continued global economic weakness, and stretched valuations. Parts of the yield curve recently inverted. Two- and three-year Treasury notes are now yielding more than five-year notes. Historically, this is an indication that the bond market expects a recession. The classic inversion threshold is between two-and ten-year Treasuries. While this point on the curve has not yet inverted, in our view, it appears we are heading in that direction.

    Two and Three Greater than Five: Yield Curve Inversion A Sign of Expected Recession

    Yield Curve Inverting

    Source: Bloomberg. Data as of December 10, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    In our opinion, another ominous warning sign from the fixed income markets is that credit spreads are widening. This signals that default risks are now increasing: Not good.

    Widening High Yield Spreads3: An Indication of Rising Default Risks

    Widening High Yield Spreads

    Source: Bloomberg. Data as of December 10, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    The equity markets have also been reacting. Implied volatility, as measured by the CBOE Volatility Index4 (“the VIX”), is hovering between 20 and 25. This is well above its 5-year average level of 14.75, and nearly three times its low level of 9.14 that was achieved in November of 2017.

    Markets Reacting with Heightened Volatility

    Market Volatility (VIX Index)

    Source: Bloomberg. Data as of December 10, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    One potential near-term catalyst to the upside is investor sentiment. Sentiment is a contrarian indicator. Right now, most investors expect prices to fall. This creates a potential near-term buying opportunity. Generally, the biggest surprises happen when the crowd shares the same view. Like everything else, this is far from perfect science.

    Extreme Pessimistic Sentiment Reversing, Creating a Potential Buying Opportunity

    Extreme Pessimistic Sentiment Reversed

    Source: Bloomberg. Data as of December 10, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    The markets are now at a tipping point. They will either shake these risks off and move forward, or succumb to them with a broad re-pricing of assets. Both scenarios are plausible. From its current neutral allocation, we believe the Fund is well positioned to adapt to either.

    NDR Indicator Summary, December 2018

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

     

    Asset Class Positioning vs. Neutral Allocation, December 2018

    Asset Class Positioning vs. Neutral Allocation, December 2018

    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.