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  • Guided Allocation

    Big Story Behind Neutral

    David Schassler, Portfolio Manager
    July 24, 2017
     

    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.

    June Performance

    VanEck NDR Managed Allocation Fund (NDRMX) returned 0.18% in June, slightly lagging the 0.26% gain for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index).1 At the same time, however, the Fund did outperform the Morningstar Tactical Allocation Category average which returned 0.0% in June.2

    The largest contributor to June performance was the Fund's overweight exposure to stocks. The largest regional equity contributors to performance were an underweight exposure to the U.K. and an overweight exposure to Pacific ex Japan. The largest regional equity detractors from performance were the Fund's holdings within the U.S. and an underweight exposure to Canada. The U.S. positioning detracted given the Fund's overweight exposure to growth over value and not having exposure to small-cap equities.

    Fund Positioning July 2017: Equity Exposure is Reduced

    At the start of July, VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning shifted slightly. The Fund's equity allocation was reduced from 61% to 59%, the bond allocation increased from 38% to 40%, and the minimal cash position remained unchanged at 0.6%. The largest regional equity allocation shifts were an increase in exposure to Japan (3.3% to 12%) and reductions to Pacific ex Japan (4.9% to 0%) and the Emerging Markets (3.8% to 0%). Within the U.S. market cap and style positioning, the overweight exposure to large-cap growth was reduced.

    Fund Positioning July 2017 Pie Charts

    Source: VanEck. Data as of July 3, 2017.

    June 2017 Performance Review

    VanEck NDR Managed Allocation Fund's (NDRMX) asset class positioning was a significant contributor to performance in June.

    As we hit the mid-year point, we remain optimistic about performance through the end of the year. As of June 30, global stocks (MSCI All Country World Index) were up 11.82%, U.S. stocks (S&P 500 Index) had gained 9.34%, and bonds (Bloomberg Barclays US Aggregate Bond Index) had risen 2.27%. The stock market continues to be faced with dueling forces. The U.S. Federal Reserve and other central banks have created headwinds, signaling their intent to wind down the scope of accommodative monetary policies. Opposing this, President Trump's goals of lowering taxes, more fiscal spending, and less regulation, have created tailwinds.

    Total Returns (%) as of June 30, 2017
      1 Mo Since Inception
    Class A: NAV
    (Inception 5/11/16)
    0.18 11.68
    Class A: Maximum 5.75% load -5.57 6.02
    60% MSCI ACWI/
    40% BbgBarc US Agg.1
    0.26 10.49
    Morningstar Tactical Allocation
    Category (average)2
    0.00 8.49
    Total Returns (%) as of March 31, 2017
      1 Mo Since Inception
    Class A: NAV
    (Inception 5/11/16)
    1.31 9.85
    Class A: Maximum 5.75% load -4.51 3.55
    60% MSCI ACWI/
    40% BbgBarc US Agg.1
    0.75 8.59
    Morningstar Tactical Allocation
    Category (average)2
    0.81 8.91

    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). 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 3.60%; Net 1.38%.
    Expenses are capped contractually until 05/01/18 at 1.15% for Class A. Caps exclude certain expenses, such as interest.

    Weight-of-the-Evidence: There is More to the Story of Being Neutral Stocks and Bonds

    We always like to explain the benefits of indicator diversity. The price-based indicators (or technical indicators) and non-price-based indicators (or macroeconomic, fundamental, and sentiment indicators) complement each other nicely. The price-based indicator composite had been bullish all year until July when it turned neutral. The non-price-based indicator composite was last bullish in January, continuing to signal that the market may be getting ahead of itself and causing the model to reduce equity exposure throughout the year.

    The small asset class shift between stocks and bonds implies that not much changed for July. However, if you only look at the changes in the Fund's positioning you may miss the larger story.

    Sentiment, as measured by the NDR Daily Sentiment Composite, recently turned bullish. Sentiment is a contrarian indicator that seeks to be wary of the crowd at extremes. Warren Buffett is probably the most quoted investor of all time, and for very good reason. Mr. Buffett once said that investors should be “fearful when others are greedy and greedy when others are fearful.” That is exactly what this indicator is trying to achieve. It is comprised of nearly 20 unique measures of investor sentiment. These include various inputs such as investor surveys, asset flows, implied volatility, and trading volume. This indicator turned bearish in May when investors were overly optimistic and became bullish in June when investors became overly pessimistic.

    The dotted lines demonstrate the extremes. The NDR Daily Sentiment Composite changes its reading when sentiment reaches an extreme and then reverses.

    NDR Daily Sentiment Composite

    NDR Daily Trading Sentiment Composite Charts

    Source: Ned Davis Research. Data as of June 30, 2017.
    Copyright 2017 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/. Past performance is no guarantee of future results.

    The bullish sentiment reading was, however, offset by a global breadth indicator turning bearish. Breadth is a technical indicator that helps us to understand the health of a trend in the market. It measures how many constituents, within an index, are participating in a trend. The breadth indicator that we are focusing on measures the percentage of countries in the MSCI All Country World Index that are trading either at or below their 50-day moving average. In the chart below, we can see that at the end of June more than 50% of the countries were trading below their 50-day moving average. When this happens we typically experience weak global equity markets.

    NDR Breadth Composite

    NDR Breadth Composite Chart

    Source: Ned Davis Research. Data as of June 30, 2017.
    Copyright 2017 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/. Past performance is no guarantee of future results.

    This is the first time all year that we have had agreement among the stock/bond indicator composites. Both the price-based and non-price-based indicator composites are now at neutral readings. Therefore, there is much more to the story than just being neutral stocks and bonds for the past two months.

    Additional Resources