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  • Guided Allocation

    Enjoy the Ride

    David Schassler, Portfolio Manager
    February 24, 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”) returned -0.58% in January versus 0.12% for its blended 60/40 benchmark. Risk re-entered the market as fears of the coronavirus swept the globe. It sent stock prices down and bond prices up.

    In January, the Fund held a 72% allocation to stocks and a 28% allocation to bonds. Over this short-time period, this top-level asset allocation positioning, driven from the NDR Global Tactical Asset Allocation Model (“the Model”), was not helpful as the MSCI All Country World Index returned -1.10% and the Bloomberg Barclays US Aggregate Bond Index returned +1.92%. The Model’s regional equity positioning contributed to performance. The Fund held a significant overweight to the U.S. relative to the other equity regions. This worked well as the U.S., as measured by the Russell 3000 Index, returned -0.11% versus -2.09% for international stocks, as measured by the MSCI EAFE Index, The Model’s positioning within the U.S. also contributed to performance. The Fund was overweight growth stocks and growth outperformed value. Growth stocks, as measured by the Russell 3000 Index, returned +2.02% versus -2.37% for value stocks, as measured by the Russell 3000 Value Index.

    This month, the Fund remains overweight stocks, overweight the U.S. and overweight growth stocks within the U.S. The only material change to report this month is that the growth bias, within the U.S., is now even bigger. The Fund’s large-cap growth allocation increased from 23.4% to 27.2% and its small-cap growth allocation increased from 5.4% to 7.9%.

    Average Annual Total Returns (%) as of January 31, 2020
      1 Mo YTD 1 Yr 3 Yr Since
    Inception
    Class A: NAV (Inception 5/11/16) -0.58 -0.58 7.13 4.94 5.74
    Class A: Maximum 5.75% load -6.29 -6.29 0.97 2.90 4.08
    60% MSCI ACWI/
    40% Bloomberg Barclays US1 Agg.
    0.12 0.12 14.04 8.97 8.79
    Morningstar Tactical Allocation
    Category (average)2
    -0.23 -0.23 9.51 5.80 5.86


    Average Annual Total Returns (%) as of December 31, 2020
      1 Mo YTD 1 Yr 3 Yr 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 US1 Agg.
    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

    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

    U.S. growth stocks continue to outperform U.S. value stocks and the Model is noticing. The recent increase in the allocation to growth equities was largely due to the technical composite of indicators. The technical indicators that most recently changed, from favoring value to favoring growth, were breadth indicators. They measure, albeit differently, the strength of growth stocks versus value stocks. And there has been a lot of strength, indeed. Just last month, when value stocks were falling with most other risky assets, growth stocks continued to march higher and lost another impressive monthly return.

    Growth has had an outstanding run versus value and the there are no obvious signs that it is slowing. However, as growth stocks continue to rise, so does the risk. The market often becomes imbalanced at market tops. The chart below is a current example.

    Apple Now has Larger Weighting in S&P 500 than Entire Energy Sector

    January 2009 to January 2020

    Apple Now has Larger Weighting in S&P 500 than Entire Energy Sector

    Source: Bloomberg, FactSet. Data as of January 31, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    Apple Inc. now has a larger weighting in the S&P 500 Index than the entire energy sector. Apple’s weighting is 4.8% compared to 3.75% for the energy sector. Another notable fact is that together, Apple and Microsoft account for nearly 10% of the S&P 500 Index!

    The Fund launched in May of 2016 and, since then, growth has massively outperformed value. The chart below demonstrates the performance of growth versus value over that period.

    Since Fund Launch, Growth Has Significantly Outperformed

    May 2016 to January 2020
    Since Fund Launch, Growth Has Significantly Outperformed

    Source: Bloomberg, FactSet. Data as of January 31, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only.

    The Fund has been in existence for 45 months. During that period, it was overweight growth in 35 out of 45 months. When the Fund was overweight growth, which was 78% of the time, the average monthly return for growth was +1.50% versus -0.39% for value.

    Winning trades do not last forever and eventually, if you believe in mean reversion, value investing will once again have its time in the sun. What the Model does not do is try to predict when that transition will happen. Instead, the Model will continue to measure risks using its objective, data-driven indicators and reduce its exposure to growth when it determines that the risks outweigh the rewards. Until then, we will continue to enjoy the ride.

    NDR Indicator Summary, February 2020

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

    Asset Class Positioning vs. Neutral Allocation, February 2020

    Asset Class Positioning vs. Neutral Allocation, February 2020

    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.