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  • Guided Allocation

    Time to Play Defense

    David Schassler ,Portfolio Manager
    November 15, 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 turns bearish on stocks.

    • Macroeconomic and fundamental indicators are mostly bearish. Defensive sector leadership, slowing economic growth, and stretched valuations are all risk factors. Global monetary policies are tightening, but remain accommodative relative to historical levels.
    • The technical indicator composite changed from bullish to neutral. Bearish indicators include negative price momentum and weak global market breadth.
    • Investor sentiment indicators suggest that prices may fall further. Global investor sentiment has been bleak since late last year and now, U.S. sentiment has recently fallen from a state of extreme optimism. This may be another warning signal that prices have further to fall.
    • While bond technical indicators are bearish, strong macroeconomic and fundamental factors remain supportive of fixed income over cash.

    Performance and Positioning

    In October, the VanEck NDR Managed Allocation Fund (the “Fund”) returned -6.29% versus -4.80% for its 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) benchmark.*

    Global stocks and U.S. bonds returned -7.49% and -0.79%, respectively.2The Fund’s 18% overweight exposure to stocks led to underperformance. The stock market selloff was broad. All of the major equity regions were down similarly. Therefore, the Fund’s overweight exposure to U.S. stocks provided minimal downside protection. Within the U.S., there was a notable difference in performance between both value and growth, and large-cap and small-cap equities. Value (Russell 3000 Value Index) outperformed growth (Russell 3000 Growth Index) by 3.77% and large-cap (Russell 1000 Index) outperformed small-cap (Russell 2000 Index) by 3.78%.2The Fund held a meaningful overweight exposure to large-cap, and that allocation was split evenly between value and growth.

    The Fund reacted to the heightened risk regime by significantly reducing its equity exposure for November. The global equity allocation was reduced from 78% to 40%, bonds were increased from 20% to 58%, and cash remains around 2%. The Fund still prefers the U.S. over the other equity regions, and within the U.S., large-cap over small-cap stocks.

    Total Returns (%) as of October 31, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -6.29 -5.49 -3.54 5.65
    Class A: Maximum 5.75% load -11.67 -10.93 -9.10 3.15
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    -4.80 -2.92 -0.67 6.54
    Morningstar Tactical Allocation
    Category (average)1
    -5.52 -4.13 -1.95 5.43

    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)1
    -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

    The Fund’s recent shift from moderately bullish to bearish is notable for a couple of reasons. Firstly, this marks the first time the Fund has become bearish since launching in May of 2016. Secondly, this demonstrates how quickly the Fund can turn bearish, reducing exposure from 78% to 40%, once the evidence changes. The goal of this Fund is to participate in the upside, and just as importantly, protect against severe market corrections. It protects by measuring market risks using its objective, data-driven indicators, and adjusting its allocations based on that risk assessment. Right now, a plethora of evidence from the indicators points to lower stock prices. These include negative stock price momentum and market breadth, defensive sector leadership, changing investor sentiment, and continued global economic weakness and stretched valuations.

    Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, recently used the below chart to provide context to the newly established underweight positon. It uses history to highlight some interesting statistics. Foremost, market dips of 5% to 9% occur often. This is typical stock market volatility. However, corrections of 10% or more are infrequent. Market dips have historically progressed to moderate corrections (10% decline or more) only 27% of the time. But the math changes significantly as the drawdown intensifies. Historically, moderate corrections have advanced to severe corrections (15% decline or more) 55% of the time, and severe corrections have advanced to bear markets (20% decline or more) 65% of the time. As of the end of October, global stocks were down just over 10% from the peak reached in late January.

    As Drawdown Intensifies, Chance of Severe Market Loss Increases
    Anatomy of Declines in MSCI World Index (12/31/1969 to 10/31/2018)

      Dip
    (5% decline or more)
    Moderate Correction
    (10% decline or more)
    Severe Correction
    (15% decline or more)
    Bear Market
    (20% decline or more)
    Number of Occurences -0.10 0.85 4.90 8.77
    Mean Number of Occurrences Per Year -5.86 -4.95 -1.12 6.12
    Mean Decline(%) 0.03 1.97 5.68 9.02
    Chances of Decline Moving to Next Stage(%)* -0.25 1.76 5.57 8.01

    * = e.g. The chance of a 10% decline turning into a 15% decline, etc. N/A = Not Applicable
    Source: MSCI; Ned Davis Research. Data as of October 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. 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/.

    What’s interesting is that U.S. stocks are just joining the correction party that international developed and emerging markets stocks have been at for most of this year. Year-to-date, the U.S. market (Russell 3000 Index) is up 2.43%.2 By comparison, international (MSCI EAFE Index) and emerging markets (MSCI Emerging Markets Index) are down 8.86% and 15.45%, respectively.2 This risk is being measured in the model by a global breadth indicator. It measures market participation through the technical strength or weakness of individual countries. Global market indices typically trade poorly when country breadth is weak. As you can see from the chart below, only 17% of countries are trading above their intermediate-term levels.

    With U.S. Correcting Now, Only Small Number of Countries Demonstrating Technical Strength
    Percentage of MSCI ACWI Countries above 50-day Moving Average

    Percentage of MSCI ACWI Countries above 50-day Moving Average

    Source: Ned Davis Research. Data as of October 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2018. 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/.

    Over the past few months we have been actively explaining this risk to investors. Weak market breadth was evident not only at the country level, but also within certain sectors and stocks in the U.S. As Tim Hayes points out in his research, we can expect the correction in the U.S. markets to have a disproportionate effect on global stocks given that the U.S. accounts for approximately 57% of the world market. As always, we remain loyal to the indicators and will adjust exposures as the data changes. In the meantime, we will remain defensive until the risk abates.

    NDR Indicator Summary, November 2018

      Macro/Fundamental Technical Overall
    Stocks, Bonds, or Cash      
    Stocks (vs. Bonds) Bearish Neutral Bearish
    Bonds (vs. Cash) Neutral Bearish Neutral
     
    Global Regional Equity      
    U.S. Neutral Bullish Bullish
    Canada Bullish Bearish Bearish
    U.K. Neutral Neutral Neutral
    Europe ex. U.K. Bearish Bullish Bearish
    Japan Bearish Neutral Neutral
    Pacific ex. Japan Bearish Bearish Bearish
    Emerging Markets Bearish Neutral Neutral
     
    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, November 2018

    Asset Class Positioning vs. Neutral Allocation, November 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.