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  • Guided Allocation

    Keep Up with Near-Term Downside Risk

    David Schassler, Portfolio Manager
    September 19, 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

    The VanEck NDR Managed Allocation Fund (the “Fund”) returned -0.32% vs. -0.36% for its blended 60/40 benchmark. The Fund is now underweight stocks based on declining global market breadth, weak medium-term trends, and slowing economic activity and earnings growth. It transitioned from neutral in August (60% stocks and 40% bonds) to 40% stocks and 60% bonds in September.

    The markets are keenly focused on two major risk factors: (1) the course of monetary policy in the U.S.; and (2) the trade war with China. Both of those issues came to a head on August 23. The day started with China announcing that it would retaliate with a 5-10% tariff on $75 billion in U.S. goods. A few hours later, the U.S. Federal Reserve Chairman, Jerome Powell, gave a speech at the Jackson Hole Economic Symposium. In it, he continued his message of supporting the economic expansion, while acknowledging that global economic outlook had been deteriorating. This message seemed to have little to no effect on the markets. Then, about an hour later, President Donald Trump announced that he would impose additional tariffs in response to China. The further escalation in the trade war rumbled the markets. The S&P 500 Index closed the day down -2.60% and contributed to the index’s August decline of -1.56%. Since then, tensions between the U.S. and China have been de-escalating but remain high.

     

    Total Returns (%) as of August 31, 2019
      1 Mo YTD 1 Year 3 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -0.32 5.76 -3.76 4.22 5.07
    Class A: Maximum 5.75% load -6.06 -0.32 -9.30 2.17 3.21
    60% MSCI ACWI/
    40% Bloomberg Barclays US1
    -0.36 12.40 4.51 7.23 7.86
    Morningstar Tactical Allocation
    Category (average)2
    -0.43 9.44 -0.93 -4.84 5.27


    Average Annual Total Returns (%) as of June 30, 2019
      1 Mo YTD 1 Year 3 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    2.82 5.88 -0.97 5.05 5.39
    Class A: Maximum 5.75% load -3.10 -0.21 -6.68 3.00 3.42
    60% MSCI ACWI/
    40% Bloomberg Barclays US1
    4.46 12.49 7.31 8.33 8.31
    Morningstar Tactical Allocation
    Category (average)2
    3.97 9.22 1.66 5.35 5.63

    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

    Global cyclical stocks are underperforming. The cyclical sectors often lead the market. This indicator becomes bearish when the short-term trend crosses above the long-term. As you can see, it has been bearish since early June.

    NDR SHUT Index Relative Strength Indicator (as of July 31, 2019)

    Economic Activity Continues to Slow: NDR Global PMI Breadth Indicator

    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/.


    Earnings growth is slowing, but analyst expectations of future earnings growth recently turned more optimistic. As you can see from the chart below, the red line (trailing 12-month earnings) had been trending downwards. Alternatively, analysts have been revising their forward earnings estimates upwards (rising blue bars).

    MSCI ACWI Trailing Earnings and Positive Earnings Revisions (as of July 31, 2019)

    Earnings Growth Slowing: MSCI ACWI Trailing Earnings and Positive Earnings Revisions

    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 has deteriorated significantly.
    Weak market breadth is typically associated with higher risk regimes. This indicator turned bearish in late July, but has been higher recently. 

    MSCI ACWI Market Breadth (as of July 31, 2019)

    Global Breadth Turned Bearish: 80-Day ACWI Market Breadth

    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/.


    Medium-term trends are bearish.
    This chart shows the medium-term relative momentum between stocks and bonds. It turned bearish in early August. It is troublesome when stocks cannot beat bonds over medium- and long-term periods. 

    120-Day Relative Stock/Bond Momentum (as July 31, 2019)

    Long-Term Trends Struggling: 120-Day ACWI Momentum

    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/.


    Volatility is rising.
     Periods of extreme volatility typically result in losses for equity investors. While we wouldn’t classify the current volatility regime as extreme, it’s on its way to becoming so.

    MSCI ACWI Short-Term/Long-Term Volatility Ratio (as of July 31, 2019)

    Tight Credit Spreads A Bullish Signal: Global High Yield Corporate Avg. Spreads

    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/.


    In summary, the Fund transitioned from neutral to bearish because the recent weakness in the equity markets and the weakness being measured in the economic and fundamental data. As always, the Fund will remain nimble and adjust its allocations as new data points become available.

    NDR Indicator Summary, September 2019

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


    Asset Class Positioning vs. Neutral Allocation, September 2019

    Asset Class Positioning vs. Neutral Allocation, August 2019

    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.

    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 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 May 31, 2019, the Fund ranked 186 out of 284 funds for the 1 month period; 218 out of 245 funds for the YTD period; 195 out of 280 funds for the 1 Year period; and 149 out of 262 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 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, 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.