Skip directly to Accessibility Notice
  • Guided Allocation

    Refilling the Punchbowl

    David Schassler ,Portfolio Manager
    February 22, 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

    Weight-of-the-evidence bearish on stocks.

    • Many of the macroeconomic and fundamental indicators are bearish. Defensive sector leadership and slowing economic growth remain risks.
    • Technical indicators are mixed. Price momentum and stock/price mean reversion remain bearish, while market breadth is bullish and market volatility is subdued.
    • Investor sentiment, as measured by trends in analyst recommendations, is bearish.

    Performance and Positioning

    The VanEck NDR Managed Allocation Fund (the “Fund”) returned 3.20% versus 5.18% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in January.*

    Last month, global stocks returned 7.9% and U.S. bonds returned 1.06%. The Fund was underweight stocks and overweight bonds. While its 3.2% return was strong on an absolute basis, it failed to keep up with its benchmark, as the relief rally continued from the Christmas Eve low. The market rally was broad, with each major equity region participating. The biggest winners were Canada (measured by the MSCI Canada Index), which was up 13.03%, Emerging Markets (MSCI Emerging Markets Index) up 8.76%, and the U.S. (Russell 3000 Index) up 8.58%. Within the U.S., growth (Russell 3000 Growth Index) outperformed value (Russell 3000 Value Index) by 1.18% and small-cap (Russell 2000 Index) outperformed large-cap (Russell 1000 Index) by 2.67%.

    The Fund increased its equity allocation, albeit marginally, from 30.8% to 33.7%. While many of the indicators are improving, particularly the technical indicators, the model continues to measure a period of heightened risk for global equities. The risk factors that recently turned from bearish to bullish include narrowing credit spreads and strong market breadth.

    Total Returns (%) as of January 31, 2019
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    3.20 3.20 -8.56 5.23
    Class A: Maximum 5.75% load -2.73 -2.73 -13.81 2.98
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    5.18 5.18 -3.15 6.95
    Morningstar Tactical Allocation
    Category (average)2
    4.66 4.66 -6.49 4.79

    Total Returns (%) as of December 31, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -4.01 -8.13 -8.13 4.16
    Class A: Maximum 5.75% load -9.52 -13.42 -13.42 1.85
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    -3.47 -5.22 -5.22 5.16
    Morningstar Tactical Allocation
    Category (average)2
    -4.55 -8.11 -8.11 2.75

    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

    Last month, the S&P 500 Index began its recovery from its first yearly loss since the Financial Crisis and worst December since the Great Depression. On January 4, Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), succeeded in calming the market’s anxiety with his message of patience. He communicated that there is no preset policy path and that the Fed will shift its course “significantly”, if necessary, to achieve its goals of maximum employment and price stability. Since then, global stocks are up 6.88%, and up 12.4% from their Christmas Eve low. While the market is cheering now, it is wise to reflect, first, on the state of a financial system too fragile to withstand meaningful rate hikes and, second, the Fed’s ability to respond to any future crises. These are complicated problems without simple answers.

    Tim Hayes, Chief Global Investment Strategist at NDR, recently noted that the Fed’s newly communicated posture of patience is benefiting certain assets. Taking a timeout on raising interest rates will help keep the U.S. dollar from rallying. A weaker U.S. dollar is good for both commodities and emerging markets. While currently underweight equities, the model likes emerging markets, relative to the other equity regions, based on valuations, rising commodity prices, and technical strength. The charts below demonstrate the recent weakness in the U.S. dollar, and the strength in the emerging markets. While the long-term trends that highlight the strength of the U.S. dollar and weakness of emerging markets are still intact, you can see that the direction is starting to change.

    Is Fed Pause Leading to Trend Reversal in U.S. Dollar and the Emerging Markets?

    Is there a trend reversal for US dollar and emerging markets?

    Source: Bloomberg. Data as of February 1, 2019. Past performance is no guarantee of future results. Charts are for illustrative purposes only. Investors cannot invest directly in an index. See important disclosures and index descriptions on last page.

    Right now, while the Fund has slightly increased its equity position, it remains defensive. That will likely change if risk continues to subside. The Fund takes less risk when risk is high and more risk when risk is low. How risk is measured and responded to makes the difference between above and below market returns. Rapid market swings are often challenging. The model responded to the high risk regime by underweighting equities. However, risk was quickly abated after Jerome Powell’s comments. The market seemingly has a bottomless punchbowl. When markets turned positive, the Fund, with its underweight equity position, was able to generate a strong absolute return but unable to keep pace with its benchmark. While it’s always disappointing not to fully participate in abrupt market recoveries, we believe that our comprehensive approach to tactical asset allocation will help investors navigate future market downturns.

    It is important to keep in mind that we are in the late stage of the market cycle. The recent CFO Global Business Outlook study by Duke University showed that 48.6% of U.S. CFOs believe the nation’s economy will enter a recession by the end of 2019 and 82% believe that a recession will have begun by the end of 2020. Global growth is slowing and eventually, like with all good things, the cyclical bull market will come to an end and the market will fall, a lot. In that environment, we believe that this strategy, and others like it, will be well positioned to protect investors.

    NDR Indicator Summary, February 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. Neutral Bullish Bullish
    Canada Neutral Neutral Neutral
    U.K. Bearish Bearish Bearish
    Europe ex. U.K. Bearish Neutral Bearish
    Japan Bearish Neutral Neutral
    Pacific ex. Japan Bearish Neutral Bearish
    Emerging Markets Bullish Bullish Bullish
     
    U.S. Cap & Style      
    Large-Cap Bullish Neutral Bullish
    Small-Cap Bearish Neutral Bearish
    Growth Bearish Bullish Bullish
    Value Bullish Bearish Bearish

     

    Asset Class Positioning vs. Neutral Allocation, February 2019

    Asset Class Positioning vs. Neutral Allocation, February 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 DEFINITIONS AND 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.

    1Morningstar 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.

    2The 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, the Fund must have minimum exposures of 10% in bonds and 20% in equity. Next, the 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 December 31, 2018, the Fund ranked 134 out of 283 funds for the 1 month period; 173 out of 283 funds for the YTD period; 173 out of 283 funds for the 1 Year period; and 101 out of 266 funds since inception. As of January 31, 2019, the Fund ranked 212 out of 287 funds for the 1 month period; 212 out of 287 funds for the YTD period; 221 out of 283 funds for the 1 Year period; and 125 out of 265 funds since inception.

    The 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.

    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 Market 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, 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.